Posts Tagged ‘sell small business’

Preparing Your Business for Sale

Thursday, January 12, 2017 @ 10:01 AM
Author: Peter Brehm

I have been working with small businesses for nearly 20 years, and I can’t say how often I have seen sellers leave money on the table because they hadn’t prepared their business for sale.  People buying small businesses are usually looking to buy a job, and are seeking confidence that they can make your business work for them.  The more turn-key the business, the better it will be for the buyer.  Which is why franchises are so successful. 

If you think you will be selling your business one day (and you probably will), here are some basic steps you can take to help make your business easier to sell, and make it more valuable.

1.      Eliminate the Black Box.  Obviously, buyers want to know if your business is making money, but presenting a potential buyer with historic EBITDA, revenue, or cash flow numbers is not enough. Buyers aren’t buying your profits from last year, they are buying the profits they might earn in the future.  If they don’t feel confident that they will be able to replicate what you earned, they will pay less for your business.  Be prepared to explain not just what your business made, but exactly how sales, marketing, equipment, suppliers, customers, intellectual property, and labor contributed to your profits.  You are, after all, the world’s foremost expert on your business, and should be able to explain how it runs in detail.  When buyers can see how your business makes money, they will be more confident that they can make money too. 

2.      Eliminate You from Your Business.  Think about your business as a money printing engine.  If a buyer purchased that engine, would it run efficiently without you, or are you the only one that knows how to prime it, or where the throttle is?  As a small business owner, of course you are vital to your business, but you must take steps demonstrating to a potential buyer that the engine will run efficiently without you.  Help you buyer visualize your business without you.  Identify key employees, and start delegating responsibilities to those people.  Prepare a transition plan that explains how you will help train and mentor your buyer in your business.  Communicate to your buyer exactly how he will be able to retain your key customers, vendors, and employees. 

3.      Clean up Your Books I.  When you own a small business, and there is enough money coming in to cover your expenses and pay expected profits, there is little incentive to keep great looking books.  But your profit and loss statement (P&L) and balance sheet say a lot about your business, and speak volumes about your attention to detail.  When a client presents me with financial statements prepared by a professional accounting firm, my confidence in those numbers goes up.  If all they have are tax returns, or some hastily assembled P&L, my confidence goes down, and I will generally advise my client to either walk away, or make some ridiculously low offer.  With the advent of QuickBooks, and other online accounting packages, there is simply no good reason why you should have bad books.  Hire a good bookkeeper or accountant, and get your books in order.   

4.      Clean up Your Books II.  I get it, you are a small business owner and you want some of the perks of owning a small business.  So, you decide to buy a building and have your company pay (mildly excessive) rent to you.  You hired your son to be your bookkeeper for $75,000 a year in stead of paying a bookkeeper $10,000.  You bought a company condo in Florida, and decided that the company could really use a yacht and a Porsche 918 to run (business related) errands.  I’m not here to judge (well maybe I am a little), but if those expenses are on your books when you present your P&L to a buyer, you are shooting yourself in the foot.  When you are getting ready to sell, stop thinking about reducing your tax bill (and living like a Rockefeller), and clean up your books.  Get a real estate agent to give you’re the market value of your rent.  Reduce salaries paid to family members to market rate (or just hire someone else).  Eliminate all non-business related expenses from your business.  Your books should reflect the most efficient operation of your business to get you a better return.

5.      Make Your Business Shiny.  Quick question:  who has more leverage, a person who looks like they must sell, or a person who looks like they don’t have to sell?  Years ago, I worked with a man who owned a restaurant and decided that he was going leave his business in a couple years.   So, for close to three years he spent next to nothing to fix his equipment, his furniture, his fixtures or anything else.  When buyer came around and saw the mess that was waiting for them (torn carpets, ovens on their last legs, dated furniture, and worn out fixtures), it directly reduced what they were willing to pay.  More importantly, the buyers knew that the seller had to sell, otherwise he would have to absorb the costs of updating the FF&E.  He had painted himself in a corner.  When you present your business for sale, it should look like you could run it for another 10 years if you wanted to.  Operate your business as if you will never sell, until you do.  Keep your vital equipment in good repair, replace worn fixtures, keep employment agreements up to date, enforce non-compete agreements, protect your copyrights and trademarks, and update your vendor and customer agreements. 

There are, of course, more things you can do, and each industry has other steps that might be useful. But, if you can take simple steps that will give potential buyers confidence that they can replicate the success of your business, you will  be more likely to sell your business and get paid fairly for it.

Peter C. Brehm, J.D., LL.M., CVA

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