As a business owner, you know that every major decision requires careful thought and preparation. What bigger decision is there than opting to sell your business and then under what terms and for what amount?
If plan to sell your business in your future, it’s not as simple as putting up a for-sale sign and inviting bids. While you can do this, there are a number of actions and considerations to prepare for a successful sale that can make the business more attractive and ultimately optimize your value. Preparing your company for a sell transaction will also help make the negotiations easier and make the transition smoother for your employees.
Here are seven steps to help you better prepare for a future transaction:
1. Develop a strong management team
You need to realize that you’re selling your business, not yourself. Prospective buyers will want to see a strong supporting management team that will continue to lead and manage the business without your presence. You need to demonstrate that the business can flourish without you, so make yourself redundant. The stronger your team is the more valuable your business will be.
2. Focus on your financial results
You should evaluate the business profitability from an objective point of view and consider ways to maximize profitability before deciding to sell your business. Starting a profit enhancement initiative in the middle of a sale process means you missed your best opportunity to maximize your value. Ideally you want to have demonstrably higher earnings in the years immediately prior to when it’s time to sell.
Also, don’t wait for a transaction to clean up the balance sheet and improve efficiencies. Look for opportunities to remove non-business assets and monetize redundant or under-used assets ahead of a transaction. Focus on spending and expense control opportunities so you can maximize your earnings and cash flow.
3. Demonstrate quality business processes
Take time to really understand your business operations and the processes in place to run your business. You should document your processes and best practices, then implement a culture and practice to continually seek improvements in efficiencies that will add value to the organization.
Reliable financial statements and accurate, timely reporting are also attractive features that often influence a buyer’s decision. Presenting your business with solid cash flows, strong management teams and lower capital expenditure requirements, will position your business as an attractive acquisition.
4. Develop desirable customers
Diversification and quality is more than just a concept for managing an investment portfolio. It also has an impact on the value of your business. To many buyers, an ideal business has a strong customer base with very modest customer concentration. While some customer concentration may be an unavoidable reality for many businesses you should work to expand your customer base and the quality of your relationships. Having signed contracts with customers will increase confidence that customers will be retained with the business after the transfer of ownership. Providing margin reports by customer and having current accounts receivables will demonstrate the quality of your customers.
5. Separate personal matters/activities from the business
When it’s time to sell the business, you need to take the “family” out of the family business. Hidden personal finances and activities often cause concerns and issues in negotiations, so clean up and separate all of these matters from the business. From a buyer’s perspective, a business that does not have personal matters intertwined in the business provides increased confidence in the business activity and operations you present.
6. Manage your working capital
Working capital is the fuel that provides the resources for your business operations and is often an overlooked source of value. This can be difficult for an owner to firmly grasp and value but buyers expect to receive sufficient resources to operate the business. Many private businesses have challenges with properly managing the cash flow in the business which may provide an opportunity for significant improvement. While managing working capital requires time and effort, it can free up resources to operate the business and, therefore, reduce the capital needs of the company.
7. Prepare and manage a realistic and viable forecast
Most buyers are interested in the future of the business and the future cash flows it can provide. Having a realistic and supportable forecast will allow them to more quickly and confidently understand the value of the business. This also points to the credibility of management and the quality of the business processes and people. It is essential you provide potential buyers with forecasts that are reasonable, believable and achievable to fully demonstrate the underlying value of your business.
And one final recommendation – seek professional advice.
You may sell a business only once or at most a few times in your life. Assemble a team or seasoned advisors that work in this area on a daily basis. Ensure that you have the right team of professionals to advise on accounting, tax, legal, financing and transaction matters. Each will have their own role in the process and can provide you with different perspectives and expertise in their respective areas.
The right team can provide you with sizable savings and value.