Exiting a Business Successfully – The Most Important Questions a Business Owner Should Ask. Each Day! Every Day!
Preparing Your Business Today
– Pays For Your Dreams Tomorrow.
The Steps Necessary to Prepare a Business for Sale…which also can mean
Making Your Company More Profitable, More Successful, More Valuable and eventually – More Salable!
For many business owners, selling their business is the biggest and most important financial transaction of their lives. Unfortunately, many do not plan ahead. Why? Simply, it’s not a subject that is relevant in their life today….not yet. It will be though – someday. Either for them, or…for someone else.
So the question is – will selling the business be on your terms or forced upon you and your family by someone else?
Or, will you just close shop and go out of business!
When is the best time to sell a business?
Often it is when you don’t want to, but a better time is when you don’t have to. The best time, however, is when market demand wants you to!
The biggest mistake and the most unfortunate circumstance is when an owner waits too long to sell and the business begins to deteriorate…sometimes rapidly. At that point, the company may be worth considerably less than planned for – or perhaps little, if anything.
When is the right time to prepare for selling your business?
The preparation should begin on the first day of operation. My view is that it should be mentioned or considered in the business plan, in the initial formation of the company – conceptually. At the very least, you should begin preparing every day – starting today!
Why prepare now?
The sale of your business is the final goal or destination for your business plan and work. It is the GPS for your company, the North Star – that ends with the experience of transferring your business. Notice, I didn’t say “successfully” transferring.
Most companies, 80% of all those listed for sale, go out of business!
That’s right – out of business. Closing their doors with nothing to show for it. Owners didn’t prepare, or never thought of it until too late. Markets changed, your horizon of ownership suddenly closed (for personal or business reasons) and/or the lack of preparation led to a forced liquidation of a lifetime’s work.
The lifecycle of selling a business, “the process”, is much more of a journey, a direction that points toward making your company – presentable, desirable, marketable and financeable. Selling a business starts with the recognition that someday you will have to sell. The next step is when you should sell and how to sell, or more importantly, how to prepare.
For every business owner the time to sell their business is different, the motivating factors vary and sometimes – they happen quite suddenly and unexpectedly.
That is why preparing your business for sale does not mean “up for sale”. It is a course of action, a ritual, practiced every day, that will lead you – eventually – to the transaction cycle and the beginning of the end game, the selling of your business. Successfully!
The following are questions to ask yourself and to address daily, whether preparing your business for sale, starting a new company or just making your business today more successful, more profitable and more valuable!
1. Are you operating your business to finance your lifestyle or are you working to build an asset?
Wealth is obtained, held and grown in different ways. It could be in securities, both liquid and illiquid or other financial instruments. Like savings and investments, your business is also an asset. Many owners do not treat it as such. They see their business as an occupation and a mechanism to finance their lifestyle. A job.
To successfully market and sell a business it needs to be treated as an asset that needs nurturing and full development. A business is not a tax shelter. It is a potentially important financial asset that can be grown and eventually sold.
2. Is your business ready for sale?
“Ready for sale” does not mean “up for sale.” It means getting your business in shape such that when an opportunity presents itself, the best possible financial outcome can result. When addressing this topic, owners should regularly audit their business’s financial, operational, and leadership aspects of readiness. If these areas are examined, revitalized and managed properly, your company will become more profitable, more successful and yes – more valuable.
3. Are your financial statements in order? – Clean the books!
Work with your accountant and/or business advisor and prepare your financial statements. Make sure all expenses are accounted for and Income Statements and Balance Sheets are properly formed. It may take years for a company (which has been run to finance an owner’s lifestyle) to be transformed into a business asset that is presentable to a buyer. This process is about providing for the company – not you. You want to build a transferable, valuable asset – the business!
4. Are you working on generating bottom line profits and Sellers Discretionary Cash Flow?
Businesses, in the small to lower middle-market range ($1,000,000 to $100,000,000 in revenue) by and large, are sold as a multiple of “adjusted EBITDA”, also known as Sellers Discretionary Cash Flow (SDCF). The potential buyer, from the adjusted cash flow (SDCF) must accommodate interest payments and debt reduction, still take a salary and receive a return on their investment. The higher the SDCF, the more it opens the business to a broader audience of potential buyers, expanded multiples and a greater valuation.
Ideally, prepare three years (sometimes as much as five) of your business’s financial statements (Tax Returns, P&L’s and Balance Sheets) by removing any excessive personal expenses or perks you’re running through the business, and account for all cash deals. It’s better to take the hit on your taxes now because you’ll get a much larger return, 3, 4, 5+ times per dollar, from those financial benefits when selling your company.
Focus on top line and bottom line growth year after year. Grow cash flow and treat your business as an asset, so when it is time to sell (regardless how many years off on your horizon) you will reap the substantial rewards you worked a career to achieve.
5. Have you developed your business’s management team and staff – your infrastructure?
Work your way out of the business by developing a management team and cross-training your staff. If you’re responsible for most of the sales, or management, start transitioning those duties to a key employee(s).
The more days the business can be run without – you – the owner, the more valuable it is and the easier it will be to sell.
Take more vacations!
Understand, that a buyer is looking for sustainability and future scalability – post transaction. A go-forward employee infrastructure, that allows the business to operate today and tomorrow – without the current owner – is one of the most vital ‘value added’ pieces in the marketing of your company. Prepare your infrastructure well and you will be rewarded many times over.
6. Are you working each day to grow your business, or just get by?
Continually strive to grow your business. Even if your plan is to sell in the nearby horizon. Aspire to demonstrate the potential that a vibrant and growing business is today. If you become a seller, a potential buyer will figure out what tomorrow will bring and pay you accordingly.
By viewing each day as an opportunity to make your company better, you will automatically establish disciplines and habits that will realize a more transferable, successful and valuable asset – your business.
7. Have you documented your operations and “how to” procedures?
If the business practice resides mainly in the owner’s head, the buyer will be concerned about the transferring and sustaining of day-to-day operations.
The most common example is an owner who is in charge of estimating and pricing for opportunities/jobs based on a system only he/she understands. At the very least, write down the process you use. Better yet, set up an Excel worksheet that can auto-calculate an estimate based on data inputs.
Simply, document all operations and procedures. Build your business’s employee library of “how-to” manuals for all company positions – staff and management.
8. Have you cleaned up your business environment?
Much like selling a house, when you sell a company, you need to get rid of the clutter, enhance the outdoor facility landscape, dispose of and/or write-off obsolete inventory, and organize messy offices. Potential buyers notice and appreciate a clean, well-organized business. The impression is created that the owner clearly takes pride in the company and knows what he’s doing. When buyers (or even employees) see disarray, that the office, plant or overall environment is not well maintained, they begin to wonder about other potentially hidden problems such as; What is the state of the company right now? Or worse…what is real or unreal in the business’s financial documentation and asserted performance?
9. What will you do after you sell? Do you have a plan?
As a business owner you have probably lived and breathed your business, so it’s not surprising that many sellers are left thinking, post transaction – “what’s next?” A common mistake is to devote every minute of your time and all your energy to the company and it’s sale, forgetting to think about what happens the day afterwards.
To maximize your personal gain, and exit without regret, envision your life post divestiture. Make a plan and be clear about what you want to do – whether it is retirement, starting a new business or otherwise making the most of your time doing something you love.
Keep This Final Thought In Mind…
Asking these questions and addressing them each day will lead to a more profitable, successful and valuable company. This exercise pertains to every business owner, whether the company is just starting, 5 years old, or is a mature entity approaching the horizon of divestiture. “Practice makes perfect”, or when selling your business – a successful closure to a life’s work. Remember…,
Preparing Your Business Today
– Pays For Your Dreams Tomorrow.
If you would like help or more information on how to market and successfully sell your business,
Please contact directly:
firstname.lastname@example.org | 708.433.9410
email@example.com | 708.433.9410
Founder and Executive Director – howtosellmybusiness.com
Senior Chicago Business Broker and Exit Planning Consultant: Premier Business Group.
Preeminent M & A Specialist to Privately Held Companies: Manufacturing, Distribution and Service Businesses in the Chicagoland, Midwest and National markets.