You've been pondering retirement for several years and now you've finally decided to sell your small business in the next year or so. What are the steps you need to take in order to prepare it for sale and get the maximum value back for all of the hard work you've put in? Your business is going to have any number of tweaks required that are very specific to your own operation, however there are several general steps that any business can start with to make it more attractive to a buyer. Here's what every small business owner should be starting with today to optimize value in preparation of a sale:
Find out what your business is really worth
A professional valuation is an excellent indicator of fair market value, showing you where you're at so you can plan the path to where you want to be. The valuation process will also discover areas of improvement that you can immediately start addressing, either by yourself or with the help of an accountant or small business consultant. And as far as selling your business is concerned, there isn't anything more relevant to whether or not you actually sell than what your asking price is.
Buyers know what they're looking for and their advisors know what they're looking at. There are other options for sale vying for their attention and the market always wins. Therefore, any sellers who have not received an objective and professional indication of market value will either be waiting a long time or leaving money on the table due to mismanagement of expectations. At the end of the day, if you're not asking within the range of market value for your business, then your potential buyers will simply move onto more attractive opportunities.
Stop playing games with your financials
Your business is an independent entity, so if you're preparing for a sale then you need to stop using it as your personal bank account. If you're focused on minimizing tax with the way you operate, then you aren't maximizing value in the business. Pay yourself a salary and leave that value in the business so you can prove it to a buyer. Some discretionary expenses are fine, but keep it reasonable and hold onto your receipts. You need to provide proof that the seemingly legitimate business expenses showing up on your financials are actually part of the true benefit to owner.
It's also important to be aware of how it looks to a buyer if you're doing your own corporate financials. Unless you've had them properly prepared by a certified accountant, there is no reason for a buyer to feel confident in the information being presented. We won't take on a client unless they have proper financials that have been professionally prepared and do not combine the operations of multiple corporate entities. It raises questions and adds confusion, which always translates into an increase of observable risk and lowered perception of value.
Discover your barriers to transition
Unless you've been working with an accountant or small business consultant on your succession plan, chances are that you have some issues that are affecting your sale value or complicating a transition. What are they? If you don't know, then you need to find out. It's important that you analyze your business from the perspective of a buyer and their accountant & lender. If it doesn't make sense to them then it's never going to sell for fair market value, if at all.
What are common issues we come across that business owners need to work on prior to a sale? Inventory mismanagement, lack of key staff, missing or outdated systems & processes, decreasing revenue, poor earnings or a cash component that's throwing off the expense to revenue ratios, just to name a few.
If you had more time and energy, what would you improve?
Let's be honest, you only have so much time in a day and you can't do everything. However, I have yet to meet a business owner out there that doesn't have at least a few improvements they'd like to implement. The suggestions are usually prefaced by, "If I was 10 years younger and had more energy..." or "If there were only 5 more hours in the day...". Very often they hold off on making even the simplest of changes because they know they're going to sell the business.
If these changes would improve the business, make it more attractive to a buyer or increase profitability in the meantime, then why wait? Just don't fundamentally alter the core of your business, unless you plan on staying in for another 3 to 5 years. You need time to establish trends and show stability.
Call the professionals
If you think a professional is expensive, just wait until you hire an amateur. You'll be engaging with a purchaser who is represented and advised by professionals, so you need your own team with the same caliber, knowledge and experience to protect and inform you. As smart as she is, don't hire your best friend's roommate to be your corporate lawyer when she only has experience in divorces. Your golf buddy who files his own tax returns is not a chartered accountant trained in corporate due diligence. A realtor earning a living in residential housing sales is not going to have the knowledge, training or experience to ensure adequate representation or have the means to protect your confidentiality.
Enlist the services of a professional business broker who is fully trained in the process of understanding and explaining the value of your business, screening and qualifying buyers, facilitating the offer and negotiations, managing due diligence and quarterbacking the entire process from start to finish. Deals fall apart when people are no longer on the same page, so your chances of success will increase dramatically by having a skilled broker making professional referrals and coordinating the needs of all parties.
The bottom line
An important perspective to remember is that your business needs to earn it's top potential value the old fashioned way. There are no tricks you can employ against a savvy entrepreneur and the professional accountants and lenders that are advising them. At some point throughout the process everyone involved is going to know what's behind the curtain and what you've been hiding in Box #3. Don't take the risk of alienating a quality buyer; view the process from their eyes so you're equipped to deal with the intense scrutiny of the transition process. The value of your business will increase accordingly.
If you're thinking of selling your business, we would be pleased to answer your questions and assist you with this process. Let us put our expertise to work for you!
Ryan Jorden is the Managing Partner with VR Business Brokers in Calgary, Alberta, where he specializes in valuating and facilitating the sale of privately held businesses. You can reach him confidentially at firstname.lastname@example.org or visit our website to learn more. We can also connect on Twitter and Google+.