Preparing Your Business for Sale
According to industry statistics, you’ll see the average small business for sale every five years. One of the primary goals most business owners have in mind is to sell their business one day and to “cash in” for all of their hard work, sleepless nights, and stress they’ve endured as an entrepreneur.
Whether you’re thinking putting up your business for sale now, or at some point down the road, your planning should begin immediately. The result will be more money for you when you sell your business, and even if you have no plans to do so now, the short-term impact that these tactics will have on your business will amaze you.
I have been involved with countless business purchases and have seen first-hand how a properly prepared seller ultimately gets much more for their business while an ill prepared owner ends up leaving money on the table.
Make Your Business Easy To Buy
Ask any successful salesperson and they will tell you that the easiest way to sell something is to make it easy for people to buy. This does not mean giving it away; rather you should address all of the potential “hot buttons” in advance. This means that you should anticipate what buyers will want, what their concerns may be, you should be open minded, flexible and reasonable, and of course, the business should be priced at a level that makes sense given the market, the condition of the business, the future, and the investment criteria that buyers will have as their goal.
Preparing the Business for Sale
The business for sale market today is flooded with buyers. This has been the case for several years, and while there are always more buyers than sellers, there are far more serious ones today. Unlike real estate, this does not necessarily mean it’s a seller’s market. In fact, multiples paid for businesses have remained fairly stable for a while. However, what it does mean is that good businesses sell fast, and sellers get the best deal terms possible.
The most important thing you must do is to see your business through the eyes of a prospective buyer. They are the ones who will be looking to poke holes in your business, and they’ll go to great lengths to validate what it is that you represent to them regarding financials and the future viability of the business and industry. If you cannot convince a buyer that your business has a solid future then you’re only fooling yourself thinking otherwise.
Step One:
List all of the positives and negatives about the business. Don’t fool yourself. If you work 80 hours per week while you may not see anything wrong with it, the truth is that is not attractive to most prospective buyers. As such, that goes into the “con” column.
Similarly, if you don’t work too hard at the business and generate a reasonable profit including your salary, that is a major “pro”. Why? Because with a little more effort chances are that someone else will be more successful than you once they learn the business.
Step Two:
Write down every aspect of the business that an unbiased individual may see as a problem or “issue”. This can include customer concentration issues, leases that may be due to expire in the next three years, or high employee turnover.
Step Three:
Address these issues and to set up a strategic plan, even if only in bullet point form, to rectify the problems. Doing this will lessen the concern and dramatically improve your business’ health in the short-term. It will also provide the buyer with some ideas on how to fix the problem when they take over.
Step Four:
Get your books in order. If I had to name one overriding factor that single-handedly contributes to the highest multiples and the most sought after businesses, it is those with clean books and records and easy to prove financials.
If you operate a business for sale that has any unreported income, you’re making a mistake by not putting ALL of the revenue through the business. You can argue as much as you’d like, but the fact remains that the tax savings (not to mention the potential penalties) you gain from “cash” sales is insignificant compared to the payout you’ll receive if you put all of the revenue through the business.
Even though you may be saving thirty cents or so on every dollar you steal, by showing it as traceable revenue and profitability you’ll get two to three dollars for every dollar of profit. Plus, by keeping it in the business, you can use the funds to grow the business which again, will payout big dividends when the time comes to sell.
Step Five:
Consider the systems, policies and procedures you have in place. Is your business for sale set up to allow someone to easily take over and in a short time understand how the business operates? Investigate what technology can be applied to automate the business where possible and at what cost. Here too the immediate short-term benefits will be your gain, and ultimately it will allow a buyer to see that the business will transition well to them.
The Presentation
It never ceases to amaze me when evaluating a business that some sellers or intermediaries will present a company to a potential buyer with nothing more than a listing sheet. Buyers need to know as much as they can about your business whether good or bad. You won’t trick them, besides why would you? Also, by having a detailed presentation, you can save a ton of time answering the same questions over and over again from different prospective buyers.
Whether you sell your business yourself or hire an intermediary, you must put together a detailed profile that presents a compelling story about the business. This should include:
1 – An Executive Summary
This is an overview of the business in two or three paragraphs that provides a snapshot of the business, what it does, how long it has been in business, the most recent three year’s Revenue and Owner Benefit, and some compelling verbiage about the business.
2 – Business History
Outline the company’s evolution since its inception. You should note how the company was grown, challenges faced and overcome, and significant strategic decisions. If any partners were added or left, new locations opened, product lines launched, etc., these should all be detailed.
3 – Reason for Sale
This should be a simple straight forward explanation. Buyers will generally be skeptical about any reasons outside of death, divorce, health or retirement. If you’re looking to sell simply because you’re bored or want to cash out, then a more detailed explanation is warranted.
You may want to state: “Seller has been in the business since ____ (year) and feels that he has taken the business as far as he can, given his skills. He believes the time is right to generate some liquidity and look at other potential investment opportunities”. Of course you never want to mislead anybody but this language is far better than just stating: “Seller has had enough!”
4 – Products and Services
List all of the products and/or services offered by the business. Avoid being overly technical in your explanation.
5 – Marketing and Advertising
Outline all of the advertising and marketing activities that company does. If you do not do much then state so, and also explain that a new owner could likely grow the business by investing in these activities.
6 – Key Management and Employees
Without divulging names (use initials), list all management (including owners) and:
- Job title
- Job description (one or two lines)
- Years with company
- Annual compensation (salary, bonus)
- Benefits
- Any specific licenses held
7 – Common Potential Buyer Concerns
This is a section that is generally not included in business for sale profiles. I have found this to be a fantastic section to include when I have sold any business. I get wonderful comments from buyers when I present these on behalf of my seller clients.
People want to know the good and bad. If you present your business with only “blue sky” promises, it’s simply not believable. After all, if things look so great, why are you selling? However; you can put a positive perspective on most potential buyer concerns.
For example, one concern may be: “No Prior Industry Experience“. The positive to this can be: “While the seller has been in this business for XX years, a new owner, with solid business skills can acquire the necessary “know how” in a relatively short period. Moreover, the owner will remain for a reasonable time after closing to ensure a smooth transition and will be can be available on a consulting basis to the buyer after the formalized training.”
8 – Company Strengths
This is fairly simple: List all the things the business for sale does well, especially compared to the competition.
9 – Weaknesses
Every company has its weaknesses. These are “issues” that you probably should have addressed in the past, or would be considered shortcomings when evaluated independently by a company outsider. However; they do not have to be terribly negative. Rather, they should present a realistic picture of the business.
For example, what if the business does a substantial amount of business with only a few customers (known as “customer concentration”)? It could very well be somewhat typical in that type of business, or, you may have been doing business with the same group for years, or you may have a proprietary item. In fact, there can be numerous rational explanations and so you will want to elaborate on them and also provide some reasonable things a new owner may consider doing to lessen this negative.
10 – Competitive Overview
It is up to you whether you wish to disclose the names of competitors however you should note an approximate number of direct competitors, and if there are any who are significantly larger and what their strengths and weaknesses are in your opinion.
You should also outline the competitive advantages of your business for sale. In today’s information world, any competent buyer will uncover your competitors whether you tell them or not so you may as well paint a complete and realistic picture so there’s no perception that you’re hiding something.
11 – Opportunities for Future Growth
List all the things you would do if you were not selling and wanted to continue to grow the business for sale. If significant financial investment is required or recruiting skilled employees to enter these endeavors, list the criteria as well.
It is important that these opportunities be presented as possible options for the buyer and not the sole positive for the business” future. A good business should be solid and you will get a good price based upon provable past financials and a sustainable business model. If too much is riding on future activities, you will likely get a performance based offer or none at all.
12 – Three Year Historical Financial Summary
This will show what the new owner can expect to have available from the business should all things remain equal.
List out three years of the following items. You do not need the detail – only a one line summary of the following:
- Revenue
- Cost of Goods
- Gross Margin Dollars
- Expenses
- Net Income
- Add Backs/Owner Benefit Adjustments
- TOTAL Adjusted Earnings
You want it to look something like the following (list latest full year in first column):
| 200_ | 200_ | 200_ | ||
| Revenues: | $3,024658 | $2,881,425 | $2,044,180 | |
| COGS: | $1,836,921 | $1,754,031 | $1,336,562 | |
| Gross Profit: | $1,187,737 | $1,127,394 | $ 707,618 | |
| Expenses: | $ 863,265 | $ 832,433 | $ 588,290 | |
| Net: | $ 324,472 | $ 294,961 | $ 119,328 | |
| Owner Salary: | $ 128,750 | $ 96,005 | $ 84,728 | |
| Owner Benefits: | $ 75,670 | $ 46,850 | $ 39,254 | |
| Interest: | $ 49,672 | $ 38,269 | $ 32,906 | |
| Depreciation: | $ 83,678 | $ 60,377 | $ 52,943 | |
| TOTAL Owner Benefit: | $ 662,242 | $ 536,462 | $ 329,159 |
**Always reduce the Total Owner Benefit number by an appropriate allocation for future capital expenditures in an asset-heavy business. See your accountant for this line item.
13 – Purchase Price
List the asking price, terms and conditions up front, regarding your your business for sale.
With this information you can present your business in a realistic yet optimistic fashion to any prospective buyer. Obviously, the amount of detail may differ depending upon the nature and size of your business.
Regardless of how small the business may be, you will find that by doing this work and having the information in this format for prospective buyers, you will eliminate the ones who don’t qualify, or don’t like it and you will address nearly all of the questions you may be asked so it is a terrific exercise for you to complete.
