Prepare Your Business for Sale
The more time and effort put forth by a business owner in preparing to sell their business, the more likely it is that the business will sell quickly and for a higher purchase price. Some preparatory steps may not take long to implement while other steps are long term changes which may take years. A professional business broker should give business owners guidance on how they may make their business more saleable, with specific advice tailored to the business being sold. Business owners may generally get their business ready to sell by having a clear and transparent set of available financials, ensuring their commercial lease is in good standing with the landlord (preferably with a long term lease), and creating a realistic transitional plan for a smooth take over by the buyer after the sale. It’s always best to sell at a time of peak performance when the business has a loyal customer base with favorable market conditions.
Transparent Financials Critical for Business Sales
The most common way in which business owners may get ready to sell their business is by ensuring that they have a clear and transparent set of financials. A financial statement may be a twelve month profit and loss statement or a tax return. Buyers of businesses use financial statements as a way to gauge the financial performance of the business, and specifically to determine the actual amount of net profit – or adjusted owner benefit – that the seller has received on a historical basis. For externally financed deals (usually backed by the Small Business Administration or SBA), transparent tax returns are especially important. A comprehensive and transparent set of financials has all of the company’s sales (with no unrecorded cash sales), itemizes business expenses in the appropriate expense categories, and goes back at least three years.
Financials Should Prove Adjusted Owner Benefit
Adjusted owner benefit or Seller’s Discretionary Earnings (SDE) is the true economic profit derived by a working owner of a business. This key metric is the basis by which most businesses are valued. In determining the adjusted owner benefit, one must include any personal expenses of the owner (such as personal vehicle or personal healthcare costs) that flowed through the financial statement. These costs are in reality an ‘add-back’ and part of the adjusted owner benefit. Many business owners are either unaware of the importance of personal ‘add-backs’ or unprepared for proving such ‘add-backs’ to a buyer. Business owners may prepare their business for sale by compiling a thorough list with extrinsic substantiation of their personal ‘add-backs’ in their historical financial statements.
Commercial Lease in Good Standing
Besides having organized and provable financial statements, business owners may get their business ready to sell by ensuring that their commercial lease (if they have one) is in good standing with the landlord. Payments owed in arrears to the landlord as well as any disputes with the landlord should be resolved so that the lease may transfer to the buyer when it comes time to sell. It is typically preferable for the lease to be long-term with at least three years remaining (including options to renew). This is because most buyers will want to avoid moving locations shortly after the purchase. For retail-related businesses, where location is critical, a long term lease is especially important.
Transitional Plan in Place
A final way in which business owners may get ready to sell their business is by having a transitional plan in place so that the goodwill of the business (or its overall ability to attract and retain customers) seamlessly transfers to the buyer after the sale. A practical transitional plan often involves the seller staying after the sale for a period of time in order to ensure a smooth transition. Particularly in service-related businesses, a transitional plan requires the seller to train the buyer on any aspect of the business, along with requiring the seller to introduce the buyer to key customers, suppliers, and employees. Business owners with an active operational role in their business should (if possible) lessen their active involvement prior to the sale. Although this process may take months or even years, the more absentee the business owner is, the higher valuation for the business.
Example of Transitional Plan
- Let us suppose that Jim owns and operates a commercial landscaping company.
- Prior to selling his business, Jim consults with a professional business broker about the selling process.
- Jim explains that his company services about 100 large commercial accounts, and that Jim personally knows most of the owners or property managers for each account.
- In order to effectively transfer the goodwill – including the retention of these customers – the broker knows that a transitional plan must be put into place so that the buyer will not lose these customers after the sale.
- Given that Jim has personal relationships with most customers, the buyer will want some assurance that the customers will remain intact after the closing.
- Otherwise, the valuation of the business will suffer.
- Jim and his broker thereby develop a comprehensive transitional plan that the broker may present to prospective buyers as a part of the deal.
- The plan calls for Jim to stay at least 60 days after the closing (at no charge to the buyer) so that he may personally introduce the buyer to each and every customer.
- Further, Jim will send a letter immediately after the sale to every customer, where he will introduce the buyer as the ‘partner’ of the business and assure the customers of no changes to their service level or pricing.
- In this way, the customers may be assured (to a large extent) that the goodwill of the business will effectively transfer with the sale.
- This has the beneficial effect of ultimately enhancing the valuation of Jim’s business.
Getting ready to sell one’s business is a major step in the lives of many business owners. Preparatory steps that a business owner may take to get their business ready for sale includes having a clear and transparent set of historical financials, ensuring their commercial lease is in good standing, and developing a transitional plan so that the goodwill of their business effectively transfers to the buyer after the sale.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.