Small business owners often exit their businesses through a sale of the company. Unfortunately, many companies suffer from poor exit planning, leaving sellers discouraged when they go to market.
Sellers who have inconsistent revenues, weak strategic plans, inaccurate financial records and a declining client base will find their companies either fail to attract any buyers or sell at discounted rates.
Owners should use the following strategies to optimize the value of their business before trying to sell it.
Get an early start. // Preparing for a sale takes time. Ideally, an owner should spend one to three years prior to the sale getting the company ready, although with the assistance of an adviser, this may be done more quickly. Owners should focus on business valuation drivers such as sales growth, product offering, management team and profitability.
Assemble your team. // Gather a group of talented professionals to help with the sale. A business owner will need a CPA, a tax adviser, a business lawyer and a mergers-and-acquisitions adviser. Each of these professionals brings different skills to assist in a sale. The team should help prepare due diligence materials, develop a buyer profile, structure the deal to minimize tax consequences and, most importantly, meet the business owner’s goals.
Establish long-term contracts. // Buyers find dependable cash flow attractive in a company. This could come either in the form of recurring revenue or long-term contracts. If possible, business owners should develop contracts that have terms of one year or longer and do not require the consent of the customer to transfer the contract to the new owner.
Develop a strong brand. // A strong brand and community awareness are distinct assets for a business and are part of the business’s value. Examples of assets affecting brand and value include copyrights or trademarks, patents, proprietary mailing lists, long-term contracts, a loyal customer base, a well-recognized name and a perception of quality.
Build a strong team. // A company has little value if the business is centered around the exiting owner. An owner should build a staff of key employees who have client relationships, technical expertise, knowledge of business operations and an ability to work independently from the owner. The owner should also consider offering incentives to key employees to stay through a transaction and for a period with the new owner to provide stability to the business.
Organize financials. // Buyers want to see a company’s financial data in electronic format. Unorganized and inconsistent financial
data may scare off potential buyers. For a small, privately held company, a buyer may not require audited financials, but a buyer will expect to see three to five years of well-organized financial data that has been reviewed by the company’s CPA or accountant.
Clean up outstanding issues. // Clean up any lawsuits, threatened lawsuits, insurance claims, warranty claims, supplier issues and HR issues before putting the company up for sale. Most buyers won’t accept a company with any significant outstanding problems or will significantly discount the company’s value. Not cleaning up these issues may suggest to a buyer that the company is not well-managed.
Develop a sales strategy. // A mergers-and-acquisitions specialist or adviser can help a business owner market the business. This person will work with the business owner to develop a buyer profile and business description report to attract buyers. The adviser will also justify the asking price and attract sophisticated buyers. This adviser takes on most of the work related to the sale, so the business owner can focus on growing the company.
Putting It All Together
If you are thinking about selling your company, act now. You need adequate time to prepare for a transaction, and poor planning and execution of the sale process will likely result in a significantly lower sales price. Planning ahead can allow you to reap a significant increase in the value of your business.
