Some of our most successful deals resulted from the owner’s patient, resolute commitment to preparing their business to sell at the right time, for top dollar.
The sale of a business is different than the sale of any other asset. Unlike real estate or capital equipment, which can often sell quickly at a good price, businesses usually require extensive preparation for their sale to yield maximum value.
Recognizing that a business sale is a relatively long-term proposition, IBG Fox & Fin has throughout our 27-year history taken the long view: We often create relationships with business owners two or more years before their company is ready to sell, so that we can:
- Assist in building business value.
- Maximize our knowledge of the business.
- More readily identify the best-fit buyers for the subject company.
This article focuses on item 1 – building business value – and examines some of the key steps you can take to prepare your business to bring top dollar.
Understand the Types of Value. As you consider selling your business, it’s critical to look at its value – or, more accurately, its two values: academic value, determined by a professional business valuation, and true market value.
The academic value is arrived at with a formula based on the firms’ tangible assets, cash flow, industry averages and multiples.
The fair market value also takes those items into consideration, but then considers what buyers are really and willing to pay.
For many small and mid-sized businesses, tangible assets – e.g., equipment, vehicles, real estate and inventory – may be relatively scarce. In some small businesses there may be no hard assets at all. Instead, their value is based primarily on earnings and intangible assets, such as reputation, market share, employees, proprietary processes, intellectual property, customer lists, location and business relationships.
To maximize the fair market value of your business, capitalize on those intangible assets. And begin taking a critical look – through a buyer’s eyes – at issues that might undermine your company’s ultimate value.
Seeing the value of your business from the right buyer’s perspective is a prime example of how an industry-savvy M&A advisor can help you achieve top dollar. In a recent deal, our knowledge of market conditions in an industry sector revealed a timely opportunity for a strategic buyer, resulting in the seller receiving substantially more for his company than he had thought possible.
Find and Build Your Niche. You don’t have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry.
Clean Up Your Financials. While we can help you recast your financials in the most faithful and positive light, it’s primarily up to you to clean them up.
- Make sure your inventory and asset records align with what is physically there.
- Strengthen your ratios: working capital, debt-to-equity, “quick,” price-to-earnings, return on equity, etc. (This will not be accomplished overnight; if you need to improve the quality of your financial advisors, this is a good time to break them in.)
- Rid your income statement of non-business expenses. Dubious moves designed to lower your tax bill can come back to haunt you when it’s time to sell.
Improve Cash Flows. A prospective buyer wants to see the “true” cash flow. And, of course, in the business world, cash is king. Be sure you are driving all income to the bottom line.
Review Your Assets. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use.
Develop Key Employees. Buyers generally aren’t interested in paying top dollar if the business is overly reliant on the owner for its success. If you aren’t already doing so, start delegating responsibility to key employees and involve your senior staff members in the decision-making process. Demonstrating that your company’s success rests on your team, and not just you, will pay off at the time of sale.
Document What You Do. Job descriptions, operation processes, and strategic plans should be well documented. Written records and plans give a buyer greater comfort that he or she will be able to emulate your successful growth and will help your buyer obtain financing if needed. Also, be sure to keep business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean and well-organized.
Build Relationships. Name recognition, customer awareness and your reputation are all part of your business value. Even if your company doesn’t have many hard assets, your relationships may be your most valuable commodity. If you are overly reliant on a one or two suppliers or customers, try to diversify your supplier and customer accounts.
Remodel, Clean and Organize. What’s the first thing anyone does when they put their home on the market? They freshen things up and make sure everything is in its right place. It is peculiar that, in business, that’s rarely considered. A well-maintained facility will get the best price. Even businesses that lease space can benefit from a thorough cleaning and organization to convey a feeling of quality and efficiency.
Reduce Risk. How much a buyer is willing to pay, or whether they are willing to buy at all, is influenced by their perceptions of business risks. Some areas that put the business at risk for continuing income on a long-term basis include:
- risks of customer concentration
- supplier dependency
- absence of contracts with key employees
- environmental issues and regulatory compliance
- legal challenges.
Keep these important intangible assets in mind if you’re looking to sell your business. They convey a value that financial statements alone do not. If you are looking to sell, plan. Start working on the intangibles and reducing risk well in advance of putting your business on the market. For many business owners, they reach a point where they burn out and psychologically retire early, before a sale is made. It’s important to work to keep your focus right until the sale is complete.
Finally, when the time to put your business on the market arrives, consider lining up key specialists who will help you make the most of the sale – an attorney, an accountant, and a business intermediary to name a few. Remember, you may have only one chance to sell your business, and you will want to do it right.
Used with permission from ibg/Fox & Fin, a financial advisory company that facilitates the mergers and acquisitions of privately held, middle-market companies – with a sharp focus on businesses in the western U.S. that have annual sales between $5 million and $150 million.