Selling a business requires quite a bit of preparation.
Now that you have decided to sell your business, whether immediately or in the upcoming years, you should be taking steps to prepare for the sale. Preparation takes many forms.
Preparing Your Business for Sale
1. Organize Your Financial Records
When you decide to consult with a business broker about selling your business, ensure you have the following records in order. These are formal documents representing the transactions of a business, individual or other organization. Financial records maintained by most businesses include a statement of retained earnings and cash flow, income statements, and the company’s balance sheet and tax returns. Keeping financial records organized is a key element in a successful business.
These are the statements that the business broker will use to value your business. The tax returns will be central to the valuation and to obtaining bank financing. Most business owners have a tendency to minimize their tax liability. Still, as you get ready to sell your business, your top priority should be to ensure that the tax returns reflect the health and profitability of your business. You should, of course, consult with your accountant as this process will lead to a higher tax liability, but it will be well worth it if now is the right time to sell your business.
What are add-backs when selling a business?
Part of this process should be minimizing discretionary expenses or, as we refer to them, “add-backs.” Add-backs are personal expenses that are run through the business. Sometimes, add-backs can be muddy and not clearly delineated in whether the expenses are purely personal or business-related. When an expense is not sufficiently separated from the business, the expense will most likely not be an add-back and will, therefore, not be reflected in the cash flow of your business, which will ultimately affect the value.
2. Create a Business Operations Manual
The outcome of business operations is the harvesting of value from assets owned by a business. Assets can be either physical or intangible. An example of value derived from a physical asset, like a building, is rent. An example of value derived from an intangible asset, like an idea, is a royalty. The effort involved in “harvesting” this value is what constitutes business operations cycles.
Organize Your Operations for a Smoother Transition
When you are preparing for the sale of your business, you should distill the operations of your business and create an operation manual. The procedures that you use in the business should be adequately documented. Having the operations of your business documented in writing will allow for a much smoother transition. It will also help you organize your thoughts when you speak to your business broker or a potential buyer in the future.
3. Understand Your Customer Base
The customer base is the group of customers who repeatedly purchase the goods or services of a business. These customers are the main source of revenue for a company. The customer base may be considered the business’s target market, where customer behaviors are well understood through market research or past experience. Relying on a customer base can make growth and innovation difficult.
What is your business’s customer revenue concentration?
Know where the revenues of your business come from. You should determine whether there is any customer concentration. Is there a customer that accounts for 10%, 20%, or more of your revenues? Customer concentration will likely lower the value of the business and will make potential buyers wary of the business. However, knowing the details of your relationship with the customer and the breakdown of revenues will help alleviate some concerns. If you don’t anticipate selling your business for a few years, you should utilize the time to minimize customer concentration. This will increase business value and lead to a more profitable business model that looks healthy in the eyes of buyers.
4. Document Business Organization Details
A business organization is an individual or group of people that collaborate to achieve certain commercial goals. Some business organizations are formed to earn income for owners. Other business organizations, called nonprofits, are formed for public purposes.
Inventory, Equipment, and Real Estate Space
Depending on the type of business you have, there are equipment, inventory, and real estate space that are associated with the business. If you have owned the business for a number of years, it can be easy to lose track of equipment and inventory because you have the information stored away mentally. When you decide to sell, you want to carefully document the equipment and inventory that is present in the business, including selling or discarding any inoperable equipment and writing down any obsolete inventory. This will improve the value of the business and will also be useful when potential buyers ask – and they will – for the information. Additionally, take some time to ensure that the actual space the business is located in is clean and orderly. When the time comes for potential buyers to tour the business, the neatness of the business will be just one factor that drives them to make an offer.
5. Carefully Manage the Disclosure of Your Potential Sale
Deciding to sell your business is an exciting and emotional decision; sometimes, you may want to speak about it with others. However, you should limit sharing your plans to sell as much as possible. Do not tell your employees, customers, vendors, or bankers about selling the business. Doing so may result in an erosion of the profitability of your business.
Consult With Business Transition & Valuation Professionals
On the other hand, there are other people you should be consulting about selling your business. You should speak with your business broker, attorney, accountant, and wealth manager. Consulting with these professionals will clarify your goals and help you determine how to maximize the value while reducing your tax liability upon the sale of the business.
6. Prepare Yourself Mentally and Emotionally
You should be prepared mentally and emotionally for the sale of your business. You need to consider the value of your business objectively and remember that it can only reflect what your business is and not what it can be. Additionally, when you get to the point that you are speaking with potential buyers, you should be prepared to speak in such a manner that slightly expresses your enthusiasm for the business while not allowing the buyer to get the idea that you are the business that could essentially turn away the buyer.
How long does it take to sell a business?
Be prepared to spend 1 to 3 months with your business broker in the valuation and market preparation stage. After that, selling your business could take 9 to 12 months. Setting this timeline in your head will reduce certain frustrations in the process. Also, start planning for what you will do after the sale of the business. This will help you be more motivated to sell and give you something to look forward to. Being aware of the above advice will help frame your expectations and goals.
Selling a business is a time-consuming process that involves a lot of behind-the-scenes work before the buying process even begins. By investing time and effort in preparation, you’ll encounter fewer hiccups in the process and make the process more efficient. If you’re feeling overwhelmed by all the moving parts involved in a successful business transition, KeyeStrategies is here to help. Julie Keyes has assisted business owners throughout the entire process, including building business value, constructing a long-term business exit plan, and executing every tactic necessary to seal the deal. It’s never too early to start preparing – the sooner the better – so reach out to KeyeStrategies today and get started on the path towards a business transition you deserve.