by Valerie Vaughn
This is the second of a two-part series that explores selling a business. The first article covered preparing a business for sale. You can read the first blog here. This blog takes into account factors that can make a difference between selling at a premium, or at a discount, and the best time to sell are discussed.
It’s difficult to imagine ever wanting to leave the company you’ve worked so hard to build but that day will come and when it does you’ll want to reap the financial rewards of your labor. You love the company, you’re proud of what you’ve built and you believe it’s worth millions of dollars. And as soon as you put your company on the market, buyers will start pointing out imperfections. So keep reading. I’ll discuss several factors you can control that will determine whether your business sells at a premium or a discount.
In short, buyers are a nervous lot. They want to be sure that when they buy your business, the revenue, profit, and cash flow you enjoyed will be sustainable and that they’ll be able to continue to grow and profit from your hard work when you leave. I’ve come to think about buyer anxiety as falling into two areas: Ease of Transfer and Risk around their Return on Investment.
Ease of Transfer
- Leadership. How owner-centric is the business? If you’re suddenly out with the flu does the business continue to run smoothly? Can you take a vacation without business performance falling off? An extended vacation? Do you have a management team, or a key individual, in place that allows the business to run well even when you’re not there?
- Systems and Procedures. Systems and procedures help the business run smoothly and transfer easily. Install systems, document procedures, and remember to schedule regular reviews to insure your systems and procedures are up-to-date.
- Sales and Marketing. Put a sales and marketing team in place or outsource these functions. If you own a mature business and you are still the face of the company transferring ownership will be more difficult.
- Customer Concentration. You know it’s risky to put all your eggs in one basket. Buyers know this as well so companies with diverse customer bases are preferred. If your company has one Gorilla customer and a handful of smaller customers it can still be sold but will likely sell at a discounted price. A rule-of-thumb is that no one customer should account for more than 15% of annual revenues.
- Financial Record Keeping. Easily understood financials that are accurately tied to tax returns are highly valued by potential buyers. The easier it is to trace the flow of income and expenses, the better. If you’re expensing personal items through the business – STOP! You can’t hide profit from Uncle Sam and then expect a buyer to believe it’s really there. No profit, no value.
- Revenue and Earnings trends. Buyers and banks look at a company’s historical revenue and profit over a three to five-year period. Increasing values are obviously best.
If you have built a solid leadership team, streamlined the company with systems and procedures and delegated most of the sales and marketing work, your company will be easier to transfer. A diversified customer base, accurate financial record keeping, and upward trending revenue and earnings will lessen a buyer’s perceived risk.
I began this series with the statement that few businesses are ready for sale without preparation. If you believe yours is ready, I urge you to strongly consider selling now. Why? Because the best time to sell is when you don’t need to sell. It’s a tough decision when the company is running smoothly, competition is at bay, demand is high and profits are up but that is exactly when your company's value will be at its highest. And, you’ll be in a strong negotiating position when you choose the time to sell rather than let a life event, or the economy, force a sale.
In general, now is a great time to sell. The economy is good, banks are lending, and buyers are buying. At Apex, our phones are ringing off the hooks with buyers looking for good businesses but for some reason the predicted Tsunami of Baby Boomer Business Owners who want to sell their business hasn’t hit yet. With inventory of saleable businesses lower than usual and many eager buyers, today's sellers frequently receive multiple offers to consider
Hopefully this series has helped you think through the idea of selling your business. You probably still have questions: What’s it worth? How long will it take to sell? Can my company become an ESOP? What will taxes be when I sell?
I could go on and on with questions you may still want answered but instead I’ll leave you with this suggestion: If you are building a business that you hope to sell one day, take the time to sit down with a knowledgeable business intermediary (aka business broker or M&A advisor) and discuss your specific situation. Years in advance is not too soon as it takes time to implement changes and prepare an exit strategy but it is never too early to start planning for a business sale.
Guest Author Valerie Vaughn worked with MAMTC from 2009 – 2012 as a business development consultant. During that time, she developed a passion for helping small and medium sized manufacturers improve their businesses. Valerie continues to work with small and medium sized business owners just in a different capacity; she now helps them acquire and sell businesses. Valerie is a certified M&A professional with Apex Business Advisors in Overland Park, KS and can be reached at firstname.lastname@example.org and (913) 433-2315.