Selling a business is stressful. While thousands of businesses are started every year, relatively very few are sold. Exit planning is truly a process, not an event. It takes time, and proper timing, along with planning to make a business attractive to buyers.
A solid game plan can make all the difference.
Yet time is something most business owners don’t have enough of, leaving their exit planning to another day. This is not surprising, since most business owners that we meet with are so busy running their businesses that they simply don’t have time to set aside to review their legacy options.
If you’re thinking of selling your business, consider these steps to stay on the offensive and develop a thorough game plan.
Understand the emotional aspects of selling your business
It’s often hard for business leaders who’ve focused so long on investing into their business to shift their mindset to letting it go. This can lead one to avoid the issue entirely. Yet, an exit in some form is inevitable – why not face the issue head-on and ensure it’s on your terms?
Take some time to know your own mind: gauge how you want to exit your business, to what purpose and when. Don’t let fear of change or conflict derail your aspirations. The best way to deter anxiety surrounding the sale of a business is to stay aware of concerns and address them head on.
It’s common to enlist a third party to help formulate your desires and assess your readiness. Likely they will touch on at least a few, if not all the following areas:
- Post-sale goals
- Business succession plans
- Strength of management
- Tax considerations
- Industry outlook
- Pre-sale areas needing improvement
- Gaps in value expectations
The readiness of the owner and the company weigh heavily on whether a business is sold. Those with clear goals can start working out the steps needed to achieve them, including identifying ways to make the business more valuable even while you’re at the helm.
Likewise, take some time to discuss the impact of selling with loved ones. Have a series of frank and open discussions about what the sale of a business may mean to you as well as your family and possibly employees. This is particularly valuable for family-run businesses where the company and family identity are closely tied. It’s hard to anticipate family dynamics, but chances are you’ll navigate them better if discussions are out in the open and emotions are tackled prior to a sale.
Having the proper mindset and mental focus in the months or years before a sale can help unlock value, manage emotions and time the sale for maximum gain.
When is the right time start planning to sell? It’s sooner than you think.
So now that you’ve asked, “Am I ready to sell my business” not it’s time to question “Is my business ready to sell?”
Statistics say no. Most people never go through a business sale, and without that experience you don’t know what you don’t know. It takes time, effort, planning and research – none of which comes overnight. So even if you think you are ready to sell, your business might not be.
How do you get ready? Here are some areas to start.
Get your finances in order
When it comes to selling your business, it helps to have a solid accounting infrastructure in place.
A good way to start is hiring a qualified CPA or financial consultant, such as an M&A advisor or CFO. Don’t skimp. A good financial advisor will save you more than they cost, whether through financial guidance, tax strategies or smart business budgeting. Savvy financial consultants can also provide on the right personnel and systems that can add value to your business.
Beyond this, clear accounting and business records are a requirement for a sale. After all, this is how a potential buyer evaluates the success of a company. Savvy buyers consider everything from anticipated cash-flow to real estate and stock on hand.
Having this information on hand well in advance can not only speed up due diligence and preparation for a high quality sale pitch, but also guide business leaders as they make decisions about the state of their business.
Document business operations
While you may think you are selling a product or service, to a potential buyer you are often selling is your operations: what your business does on a daily basis, how and with what roles. A turn-key business is an attractive selling point to potential buyers.
As such, gather clear documentation of your back-of-house so prospective buyers can understand how you conduct business. Be as transparent as possible.
Common operational documents provided to prospective buyers:
- Organization charts
- Processes and procedures manuals
- Supplier and customer contracts
- Shareholder agreements
- Business plans and strategy documents
- Corporate minutes
- Marketing plans
- Operating plans and related documentation
Determine what your business is worth
Now that the financials and operations are in order, it’s time to determine what the value of your company is.
Generally, a business is worth a multiple of its’ profit (2-10x, depending on the industry and company). Small businesses (under $3M in price) average 2-3 times profit, medium-size businesses ($3m to $20m) may bring in 3-5 times the profit and large businesses ($20m and over) may well fetch 5-10 times their profit.
That said, valuations are just as much an art as a science. Small businesses should have an “asking price,” but middle-market companies will often go to market without a stated price since it would serve as a ceiling rather than a floor.
Enlisting a financial advisor or broker can factor in the value of your entire company as well as consider specific market conditions. Using a third-party evaluator can also lend credibility to an asking price.
Add value to your business with a strategic growth plan
Healthy, growing companies with solid income streams are attractive prospects. As you manage your operations and financials, identify areas of improvement, ways to add value and ways to reduce risk.
From a buyer’s perspective, major risks can include too much reliance on the owner, inaccurate financial records, not enough cash flow or increases in competition. Above all else, a buyer wants assurance that the cash flows will continue well after the sale. With that in mind, take steps to minimize these risks and ensure that your business can thrive without you.
A key for a successful exit is having a thorough a forward-looking strategic growth plan, a business analysis that identifies how to improve profitability, cash flow and performance in the near-term. This also provides business leaders and potential buyers a long-term vision for the company and the details of how you are going to get there.
This mindset can not only improve profits, but also make the business more attractive to potential buyers.
The fact is, if you own a business, selling it should be a big part of your life. Starting now.
Preparing to sell is likely going to be harder, longer, and more stressful than you expect. There is no silver bullet to alleviating the stress, but the earlier you start and the more effort you put into a plan and team, the better off you’ll be.
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