Preparing a Business for an Eventual Sale
Preparing A Business for an Eventual Sale: A Step-by-Step Guide
Preparing a business for a successful sale requires careful planning and execution. Whether looking to sell the business in the near future or simplifying its long-term viability, there are specific steps to take to maximize value and attract potential buyers.
1. Evaluate the Current State of the Business
Before a business owner can effectively prepare a business for sale, it is essential to conduct a thorough evaluation of the current state. Here are some key aspects to consider:
Financial Health: Assess whether the business is profitable and if it's experiencing growth. Evaluate revenue streams, profit margins, and financial stability. Identify any areas where improvements are needed, such as reducing expenses or increasing profitability.
Customer Base: Analyze the loyalty (churn) of the customer base. Are customers staying or leaving? Be particularly mindful if a large customer accounts for a disproportionate amount of revenue, as this can be a risk factor for potential buyers.
Employee and Management Capabilities: Evaluate the training and skills of employees. Do they have the capacity and capability for growth? Consider building a skilled management layer that can operate the business independently, reducing the owner’s direct involvement.
2. Clean Up Financial Records and Prepare them to General Accepted Accounting Principles
Clear and accurate financial records are essential for a successful sale. Take these steps to ensure financial records are in order:
Separate Personal and Business Expenses: Clearly separate personal expenses from business expenses as early as possible. This separation will make the financial records more transparent and buyer-friendly.
Asset Management: If the business involves significant assets, track depreciation and the useful life of these assets. Forecast any major expenditures related to asset maintenance or replacement.
Multi-site Businesses: If there are multiple locations, ensure revenue and costs are properly accounted for across all locations.
Financial Statements: Review the balance sheet, income statement, and statement of cash flows for accuracy and completeness. Consider industry-specific key performance indicators (KPIs) to demonstrate your business's financial health. Ensure all financial statements are prepared according to General Accepted Accounting Principles. The cost of having reviewed or audited financials is typically worth the investment.
3. Improve Business Operations and Systems
Identify gaps and areas for improvement within the business operations and systems. These gaps should align with the areas identified for improvement during the evaluation of the current state of your business and the process of cleaning up financial records.
Buyers typically pay a premium for well-organized and efficiently run businesses. Building a strong management layer is key to increasing buyer confidence and ensuring a seamless transition to a new owner. Benchmark the company's performance against industry competitors to identify areas where the business excels.
4. Prepare All Necessary Legal Documents and Contracts
Ensuring that legal documents and contracts are in order is crucial:
Review all existing customer and supplier contracts, leases, and agreements to ensure they are legally sound and can be transferred to a new owner. Document intellectual property (IP), licenses, permits, and any pending litigation, providing a clear path to resolution. Organize and make these documents easily accessible for due diligence.
5. Determine the Value of the Business
Understanding the business's value is essential for setting a realistic asking price:
Use different valuation methods such as the asset and income method or comparable multiples. Be extremely careful in using any type of Discounted Cash Flows or future-looking projections. The buyer will be taking on the risk and responsibility for running the business and will not pre-pay upfront for future potential growth. Consider hiring a professional appraiser or business valuation expert to provide an accurate assessment. Knowing the business's intrinsic worth will prepare the owner for realistic offers. from potential buyers.
6. Seek Professional Guidance and Advice
Professional guidance can be invaluable in the sale process:
Consult with an M&A Advisor to receive a realistic, market-based valuation of the business. They can also help find potential buyers and navigate the selling process. Engage a trusted attorney with experience in business transactions to review legal documents and ensure the sale is legally sound.
7. Be Prepared for the Challenges of Due Diligence
During due diligence, the buyer will thoroughly assess the business's financials and operations, examining documents like financial statements, contracts, customer data, and day-to-day operations. Transparency and accuracy in this stage are paramount for building trust and completing a transaction. If the buyer gains confidence in the business's operation and performance, the business will warrant a higher purchase price...
Buyer assesses financials, contracts, customer data, and operations during due diligence.
Transparency and accuracy are crucial for trust.
A confident buyer may start negotiations with a higher initial offer
Summary
Preparing a business for a successful sale always pays back dividends either in a future sale or in increased profitability and efficiency. While this guide can provide a high-level roadmap, but developing a long-term plan to prepare a business for a sale and increase value and marketability takes a lot of time and proven experience...
