“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” – Abraham Lincoln
Prepare Your Business to Sell for Best Price Possible
Preparation is always the key to success in a business deal (and in life), and never more so than when it comes time to selling a business. In order to plan their best exit strategy, business owners should gradually but surely prepare their business so it sells for the best possible purchase price. Three preparatory steps to a successful business sale are:
- Reducing one’s role as the owner of the business
- Keeping track of one’s company’s records in an organized way.
- Having as ‘clean’ set of financials as possible.
Reducing the Owner’s Role Before Selling Your Business
Businesses that are run by an absentee owner have higher valuations than businesses that are run by active owners who are involved in the day to day operations of the business. When a buyer is faced with the daunting task of replacing an active owner who has personal relationships with employees, customers, and suppliers, then the valuation of the business may suffer. This is because the buyer will have to absorb the costs to replace the owner after the sale either with their own labor or from having to hire increased managerial staff. If it is possible for an owner to reduce their role in the business, then doing so will greatly enhance the value of the business when it comes to sell.
Owner Should Not be ‘Irreplaceable’
When an active owner has a personal relationship with key customers, employees, or suppliers, then buyers become frightened that they (as the new owner) will possible lose customers or business after the sale when the old owner is no longer around. Additionally, buyers will calculate the cost of having to replace a working owner (and/or their spouse if he or she is also active in the business) when deriving their valuation of a business. As a result, they will either be afraid to purchase the business at all or will give an offer that is not satisfactory. By slowly delegating responsibility and tasks to a managerial staff, the owner may prepare their business to receive a much higher purchase price when it comes time to sell.
Organize Company Records
A key way to prepare one’s business is for sale is by organizing important company records. Such company records may consist of the original incorporation documents, shareholder certificates, W2 records, customer invoices, and insurance certificates. If the records are tracked by date then that is even more helpful. Keeping track of one’s company’s records in an organized way comes easy to some business owners. For others, not so much. But when it comes time to sell, a buyer will typically require a thorough due diligence process before closing. This due diligence process will ask for all these records, so having them organized and in place greatly facilitates the sales process.
Transparent Financials Improve Valuation
Having a clean set of financial records is by far the most important preparatory step one can make before selling a business. Financial records primarily include historical tax returns, profit and loss statements, and balance sheets. The goal of the financial records is to prove the adjusted owner benefit of the business. The adjusted owner benefit is simply the true economic profits derived by the owner of the business (including personal expenses that are expensed in the financial statement, unrecorded cash, and the owner’s salary). If the financials are transparent and organized enough to show the true adjusted owner benefit, then the buyer of the business is likely to pay a higher valuation. Moreover, transparent financials are also necessary for a buyer to receive external funding.
- Are all your sales reported on your tax returns (and sales tax returns)?
- Are your business expenses all reflected in your tax returns?
- Are all of your employees paid appropriately and legally?
- If you run personal expenses through your business, do you have appropriate evidence of this so that such personal expenses can be ‘added back’ to your owner benefit?
- In some industries, this may not all be necessary because doing so is not the industry norm.
- Also, some buyers may simply not care because they understand the industry norms or can conduct due diligence through other means.
- For most buyers and for most industries, however, having a clean set of books is a must for a buyer to pay a fair price for a business.
- Moreover, a buyer seeking SBA (Small Business Administration) financing will not be able to get funding unless they are given a coherent set of financial records.
If you’re thinking about selling your business, give Martin a call today to learn how you specifically can start preparing your business so it sells at the highest price possible.