What if I'm not ready to sell now?
You should sell your business when you are ready and when the time is right. A competent business owner should always have an exit strategy. Click here to find out more about exit planning. The following list of items will not only add value to a business but will also increase its marketability. If you are not ready, contact us for help with your exit strategy.
Increase
sales annually - Remove yourself from the business
- Develop a strong management team
- Replace family members that work in the business
- Reduce the amount of owner perks
- Sell unnecessary assets
- Reduce inventory to a manageable level
- Develop a strong sales force
- Diversify the customer base
- Develop an organizational chart
- Reduce unnecessary large purchases
- Additional steps used to prepare for a later sale
1. Increase sales annually
When time comes to sell, annual sales to a business are equivalent to location
in real estate. Sales is one of the main variables that buyers review when
they are evaluating a business. They are hesitant to purchase a business
with sales on the decline. If they do, the value they are willing to pay
is usually at a significant discount. Buyers are leery anyhow since they
feel that sellers must be hiding something; therefore, decreasing sales are
very difficult to validate as a reason for selling.
2. Remove yourself from the business
If you are the business owner that reminds people of "Norm" from the sitcom "Cheers",
where everybody knows your name that may be great for business, but could be
harmful for a business transfer. In order to maximize the market value of a
business, owners have to disassociate themselves from the business and have
customers, employees and suppliers sign on because of the company not the owner.
This point cannot be clearer than when your name is Joe Doe and you own Joe
Doe Supply Company.
The best method of removing yourself from a business is to train your right-hand person to take on some of your responsibilities. You can take it a step further and train someone to fill his shoes in case you lose a main employee. The greater the infrastructure, the more valuable a business will become.
3. Develop a strong management team
In addition to removing yourself as the point person, developing strong management
is equally important. The expression, "People are the most important asset
in a business" could not be more true when a business owner is selling. A
buyer can analyze financials and examine equipment and inventory to determine
tangible economic value. This analysis is clear-cut. One of the major factors
that will move this value up or down is the quality of the employees. How
long have they been there? What industry experience do they have? Is there
backup to the owner and the important managers? Will there be key employees
to assist the new owner with the business?
Selling a business for only tangible assets and financial figures will net minimal value. The extra amount that can be received is in the infrastructure, that is, the employees. Investing in employees will pay off during the time a seller owns a business and ultimately during the business transfer.
4. Replace family members that work in the business
Having family member work in the business is one way to build a business. Unfortunately,
it could be a huge detriment when the time comes to sell. A prospective buyer
will be very concerned if a seller's wife, son, brother, etc. work in the
business due to the uncertainty of employee retention. Even if the family
members agree to stay on after the business transfer, the buyer might still
have concerns. It is common for family members to be paid more than a regular
employee in the same function, which could cause concern for a buyer. In
addition, there might be the perception that the family member is not the
most qualified within the company, but rather that nepotism took over. This
would lead a buyer to surmise that he is not getting the most qualified person
for the job.
5. Reduce the amount of owner perks
Most small businesses owners "live" out of their business. In the small business
arena, if you have hired a good accountant, the net income on the year-end
tax return is usually between $0 and $100,000. This does not mean the cash
flow to the owner is low, since the difference is usually in salary and owner
perks. These owner perks can include: health insurance, auto insurance, meals,
entertainment, travel and personal purchases. Even though these perks are valid,
often first time buyers have a difficult time understanding all of them and
at times dismiss them in their cash flow analysis.
EBITDA plus owner salary is the most common form of cash flow to a buyer. In a small business, owner perks can often be a large percentage of the total cash flow. Since lending institutions and buyers focus on EBITDA, it would be wise to reduce or eliminate owner perks for one or two years prior to selling a business. In addition to reducing perks, it is mandatory that the perks you continue to expense be paid through specific and verifiable expense line items.
6. Sell unnecessary assets
Most business owners have accumulated obsolete, duplicate, or unnecessary assets
over time. When marketing a business for sale, it is difficult to obtain
a price based on the amount of assets if they are not necessary for the operation
of a business. By selling the assets in advance, the business owner gains
added revenue from the sale of assets and a better business package to sell
off what is left. The sum of the parts should always be more than the whole,
when it comes to selling unnecessary assets and then the business.
7. Reduce inventory to a manageable level
Similar to unnecessary assets, inventory should be kept to a minimum to maximize
a business transfer. A buyer will not pay for dead or obsolete inventory.
Before closing, most buyers will take a physical inventory count to ensure
the inventory for which he is paying is accounted for and in good condition.
In addition to dead and obsolete inventory, excess inventory can hinder a
business sale. Normally, a buyer will only want the inventory that is necessary
to run the business. If inventory levels are too high, the buyer might not
be able to substantiate or afford the sale price with the excess inventory
included.
8. Develop a strong sales force
A salesperson is very easy to find, but an effective salesperson is very difficult
to find. Most businesses that sell a product or service can improve their
sales with additional salespeople. When selling, a prospective buyer will
pay special attention to the method used to increase sales. If the owner
is the only salesperson, red flags are bound to come up. Conversely, if a
solid sales team is in place, the buyer will feel more secure.
9. Diversify the customer base
The old adage, "Don't put all your eggs in one basket", applies to a business
owner's customer base. Though having few customers might make it easier for
an owner to run his business, a buyer would not want to inherit the risk of
the business's customer base concentrated in one or two large customers. Diversifying
the customer base will not only increase the chances of selling a business,
but also will stabilize sales and reduce the effect of losing a customer. To
be most effective it would be wise to never have any single customer account
for over 20% of sales.
10. Develop an organizational chart
Since employees are of key importance, an organizational chart
acts as an excellent tool to summarize the team. The chart should include:
tenure, pay, position, and job description. Having a snapshot of the
workforce will make it easier for a prospective buyer to evaluate the
employee infrastructure.
11. Reduce unnecessary large purchases
If large purchases are needed but not essential, let the buyer decide if he
wants to make the investment. It will be easier to offer a business at a
price that does not include a recent large purchase. As long as the rationale
is explained, a buyer will be grateful and will be in position to make a
more informed decision.
12. Additional steps used to prepare for a later sale
- Eliminate unproductive employees
- Develop and/or improve company website
- Have written procedures for operations (i.e. employee manuals)
- Keep you're A/R higher than A/P
- Keep A/R within 30-60 days
Find out about EXIT: A Business Owner's Guide To
Selling A Company
by Alexander Vantarakis and William Whitehurst
