A major issue for many small business owners surrounds an exit strategy. One potential route is passing the business on to the next generation of the family or some sort of sale to a group of senior managers. Sometimes this is not an option and the best exit strategy for the owner(s) to realize the most value from their hard work is selling the business to an outside party.
Here are some steps business owners should take to prepare their business for an eventual sale.
Ensure the business can run effectively without you
In building your business, you were likely involved in every aspect from sales and marketing to bookkeeping and human resources.
To take any business to the next level it is often necessary for the owner to hire outstanding managers and to let them manage. This is a good business practice regardless and should be implemented long before the decision to sell is made.
Along these lines, the business should have the normal business processes and systems in place. These will range from a formal accounting system to product and service definitions, the company’s sales process and marketing strategies. Formal job descriptions for employees and an organization chart would also be useful for prospective buyers.
Prospective outside buyers are looking to buy a company that can run without you. Would your company continue to run profitably with you out of the picture?
Get a valuation
Before putting your business up for sale, an independent professional valuation will be needed. The valuation will generally be the starting point when trying to agree on a selling price with a prospective buyer.
Different businesses will have different valuation metrics. Some might have tangible assets like a physical plant and equipment. For a service business, the value may lie in the client list, a proprietary service or process or some other intangible asset. It is important that you hire a valuation professional who understands your type of business and the industry that your company is in.
Regardless, any prospective buyer will want to see a professionally prepared set of financial statements, ideally several years’ worth.
Be sure your business is ready for sale
Potential buyers of any small business want the sale to be as clean and hassle-free as possible. To ensure a smooth sale and transition, sellers will want to be sure that their company has its “ducks in a row” upfront. This includes areas such as:
Legal issues. Make sure that all assets owned by the business are free of liens or encumbrances. If you lease property or equipment, make sure those leases can be transferred to the new owners. Are all business licenses up to date? Are there any pending legal or labor issues?
Financial issues. Make sure all financial statements and tax filings are current and accurate. This goes for internal financial documents such as cash flow statements, accounts receivables and payables as well as your inventory. This is the time to upgrade to a better accounting system and possibly a better outside accountant.
Customers. Are your customers loyal, long-term clients of the business? Do you have service agreements in place where applicable? Are you the sole reason that customers do business with your company or have you built a sales/customer service operation that runs with or without you?
Business and operational issues. Is your business equipment up to date? Does the organization have staff and management in place to keep the business moving forward under new ownership? Is the business model viable and profitable? Do your key employees have management contracts that don’t terminate with a transfer of ownership?
Commit to making improvements prior to the sale
If after a thorough review, any of the issues in the prior section or other aspects of your company fall short make a commitment to shore things up prior to trying to the sell the company. Put yourself in the shoes of a prospective buyer.
If you can buy a strong, turnkey business that functions well without the owner, has current and accurate financials and is a leader in its industry wouldn’t you pay more for this business than one that isn’t all of these things?
What is your own plan?
By selling the business you are giving up control and a new owner might want you completely out of the picture. Or conversely they might want you to stay around for a bit to facilitate the transition both internally and with key clients. Decide in advance if you are OK with either option or want to move in one specific direction.
For many business owners, the value they have built via their business is their retirement nest egg. Getting your business ready for sale is key to realizing the greatest value from a prospective buyer.
The steps outlined above are not something to do just prior to putting your business up for sale. These steps should be taken many years prior to any thought of selling your business, in fact these steps are sound business practices that can benefit any business at any stage of its development.
If you would like more information about preparing your business for sale, give us a call at 410-626-8198. We help business owners coordinate many aspects of their personal and business finances.