“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” – Abraham Lincoln
Preparation is always the key to success in a business deal (and in life), and never more so than when it comes time to sell your business. Three preparatory steps to a successful business sale are:
- Reducing your role as the owner of the business
- Keeping track of your company’s records in an organized way
- Having as ‘clean’ financials as possible.
Reducing the Owner’s Role Before Selling Your Business
Reducing your role as the owner of the business may not be possible. But if it is possible, then doing so will greatly enhance the value of your business when it comes to sell. The reason is that most buyers will be afraid that if your role in running the business is too valuable, then customers will leave when you leave.
When Owners are Seen as Irreplaceable by Buyers of Business
In particular, whenever the owner has a personal relationship with key customers, buyers become frightened that they (as the new owner) will lost those customers who will only want to deal with the old owner. 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 your business. As a result, they will either be afraid to purchase the business at all or will give an offer that is not satisfactory.
Slowly Replace Yourself Before Selling Your Business
So if it is at all possible, slowly replace yourself as the owner with a manager or by delegate responsibility to other employees. This process should take place a year or more before selling, and will result in a much higher purchase price.
Organize Your Company Records Before Selling Your Business
Keeping track of your company’s records in an organized way comes easy to some people. For others, not so much. But when it comes time to sell your business, a buyer will typically require a thorough due diligence process before closing. This due diligence process will ask you for all kinds of business records, financial documents, insurance certificates, W2 records, and customer invoices.
Transparent Financials Help with the Selling Process
Having a clean set of financial records is by far the most important preparatory step you can make before selling your business.
- 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, 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.