One day you will sell or transfer your business so you can move on to the next chapter of your life. Too often a business owner waits until they are ready to sell their business to start planning their exit. Unfortunately, this can lead to a reduction in value. Here are some best practices to follow long before you’re ready to sell:
1. Get your finances in order
Your financial statements are key to determining the value of your business. You need to make sure you have clean financials prepared by an accountant so a buyer can easily see how your business works. A buyer reviews (at least) the following financial reports:
2. Think about customer concentration
Buyers want to see a good distribution of sales across a company’s customer base. You know that when a business relies heavily on two or three customers for a large portion of its revenue, it’s a big risk. A company with a high concentration of customers is not easy to sell and is unlikely to be funded by a buyer. Recently we had a seller whose business has been quite profitable in the past; However, one customer accounted for more than 70% of their annual sales. The interested buyer sought an SBA loan for the deal and was unable to obtain approval due to customer concentration. Look at your customer reports and see if a single account accounts for more than 20% of sales. If this is the case, focus on de-risking your customer base by preferably acquiring new customers in a different industry.
3. Minimize owner trust
As you prepare to sell your business, it’s important to be aware of how dependent your business is on you. It is a risk for a buyer to see that success depends too much on the owner himself.
ask yourself…
- Can I take a longer vacation without anything breaking while I’m away?
- Does business depend on all the information I have in my head?
If you answered yes to any of these questions, it’s time to think about how to minimize dependency on yourself, build your team, and start delegating responsibilities.
4. Understand the value of your business
One of the main reasons companies don’t sell is directly related to their asking price. It’s very common for business owners to have an inflated sense of what their business is worth compared to what it’s actually worth. This discrepancy creates unrealistic expectations of what your business can sell and can delay the sale of your business.
Before you sell, find out how a business valuation works and how it can help you sell your business quickly. Then work with a credible valuation expert to determine the true value of your business. Your professional opinion will help you set realistic expectations and set a sale price that will attract buyers. An added benefit of obtaining a third party assessment will also help you identify areas of weakness in your business and opportunities for future value creation. It will also help your financial advisor plan your retirement accurately.
5. Lose personal expenses
Most business owners run personal expenses through their business and look for ways to reduce taxable income. However, when you sell your business, the goal is the opposite: you want to make as much profit as possible to get maximum value. If you know you’re looking to sell your business, it’s a good idea to start cutting out your personal expenses as soon as possible. Yes, you will lose the tax write-off, but you will more than make up for it if you sell the business. If you don’t believe me, read this article.
6. Hold on to key employees
The job market is really tight right now. A buyer is concerned about staffing every business they buy, and having a dedicated team on site is an attractive perk. To maintain a strong and reliable team for a potential buyer, avoid telling anyone your business is for sale, especially your employees. Employees who are in the know may get nervous because they have a new boss and are leaving. A company that is not fully staffed will attack you with potential buyers. Confidentiality is key.
7. Have the buyer’s eyes
Approaching a potential buyer is more than a numbers game. Think about how your business looks from a potential buyer’s perspective. Look at your website, your brand, your communications and what sets you apart from your competition. Ask others you trust what their first impressions of the company are to see if they can see things you can’t. If you think like a potential buyer, you can make the appropriate adjustments while you still own the business. So when a buyer comes knocking, they will be confident that your business can fetch the top price.
The bottom line is that your business is one of your most valuable assets. By focusing on the tips we have mentioned in this article, you will build a more valuable and salable business. At Murphy Business, our goal is to help you navigate the complicated process of buying or selling a business so that you reach the closing table successfully. If this appeals to you, contact us today. We would like to learn more about your company and your goals.
