When an Owner is Ready to Sell…What He Must Do!
The business owner who woke up one morning and said to him or herself, – “I’m really tired of going in to work”, or thought “this just isn’t fun anymore” – may discover they are too late investigating the adventure of selling their company, perhaps incurably too late.
Interesting how every business has a plan, a beginning and a course of action, but rarely does it think about a destination… a company end point. Does your company or you personally have an end point? An exit strategy? Just not ready to consider it?
You will be!
Sooner than you think and oftentimes – unexpectedly soon.
Exiting Your Business Successfully
You have a mission statement, but do you have a final goal, a destination for the business, for yourself and family…an exit strategy? A business GPS…at least in concept? Sooner or later you, or someone else, will have to sell or close your company. Do you want this to occur on your terms….or someone else’s?
Twenty, thirty plus years ago, no one would have thought that one of the biggest, most iconic business brands in all of American retailing history – Sears Roebuck – would ever be sold. Too big, too successful, too market dominant…(J.C. Penney anyone?)
They’re right. Today, Sears won’t be sold. It’s being liquidated!… slowly, piece by piece – until there will be nothing left, but memories.
Markets change, so does the business environment – and your company may well have to as well!
So, when is the best time to sell a business? Usually, the best time is when the business is generating its greatest profits – or oftentimes, it’s when you don’t have to, which can also mean, WHEN YOU DON’T WANT TO. Why? Because it is then – the most valuable to the most buyers!
Can’t say this enough, it is better to sell your business too early than too late, for ‘too late’ often means “not worth much”.
It is never too soon to contact a business advisor and explore the journey of selling a company (firstname.lastname@example.org | 708.433.9410). It can take from a few weeks to many years just to prepare a business for market. This exhausting and time-consuming process involves making your business more presentable, marketable, financeable and most importantly – more valuable! A “best practice” to follow each and every day is – do everything possible to make your company more successful. Never stop trying to improve!
The Five Critical Elements Necessary to Successfully Sell Your Business
The following are five essential areas that need to be addressed to have a successful sale of your business. Notice, I said successful, not just a “sale”.
Successful means obtaining and fulfilling your goals and aspirations before, during and after the sales process.
1. Clean and Verifiable Financials:
It all starts and ends here!!! Full stop. This is where everyone begins to look and evaluate your company. If the business model doesn’t make sense, both ways you spell cents/sense, you have a serious problem. Within the financials (balance sheets), the bones are buried – and experienced buyers know it.
The company and owner income streams, as well as all personal financial benefits need to be identified from the business’s Tax Returns and P&L’s. Usually three to five years of financial statements are requested. Be careful on the aggressive use of your business as a tax write-off. If a bank is involved, or financial institution, or the SBA, all revenues, business deductions and personal income streams will need to withstand a forensic accounting. The more aggressive you are sheltering income, the more likely a bank will hesitate becoming involved.
All owner(s) income streams, business generated financial benefits and deductions need clarity and most importantly – a verifiable trail through journal entries, bank statements etc.
Financeability can be critical to a successful sale. Rarely will a buyer use all cash for an acquisition. Regardless of size, the buyer will leverage the transaction either through a financial facility and/or utilizing the Seller.
2. Seller’s Discretionary Cash Flow (“SDCF”) or Seller’s Discretionary Earnings (“SDE”):
This is the most important metric used in valuing your business. It is the bottom line. Why? It demonstrates what funds will be available for the acquisition to pay for debt service, a new owner’s salary, and a return on the down payment investment. The SDCF needs to show good growth or stability year to year for three or more years.
SDCF is the company’s profit, as shown on the tax return, plus adding back ownership’s salary, bonuses, distributions and any other financial benefits (insurance, phone, car etc.) paid for by the company. SDCF includes income taxes, interest expenses, and any non-cash expenses such as depreciation or amortization.
This is the attention grabber!!! The first thing a buyer looks for and an essential item on a banker’s mind. Where does the owner’s and business’s revenue come from, and is it sustainable?
The business, your company, is a machine that makes/prints money. That ability to generate money is what the buyer is paying for and a banker is financing.
3. Company Infrastructure: Have the personnel in place to fully operate the business.
Your management team, and key personnel, are critical assets in the total value your business brings to a buyer. Cherish your key employees!
A sole “owner operated” business, with limited infrastructure, diminishes the value of the enterprise. Why? Is the business principally driven by the owner through his personality and skills? And when he/she leaves – then what? Buyers don’t pay and hope for ‘then what’. Or can the business and its products and services stand-alone…operated by a new owner or others beside the owner? If so, you have added value to the entity and made your business much easier to market to a larger universe of buyers.
4. Technology Updates:
Years ago, for a smaller business, this was not as important, but today, in a rapidly changing business environment, it is critical to preserving market share. Keep your company up to date with industry technology for management, billing, operations and sales. Web presence, social media platforms and an integrated performing Customer Relationship Management (“CRM”) programs are required in today’s technology driven sales and service marketplace. Continually strive for ‘best in class’ industry levels.
Buyers are reticent to acquire a company that needs immediate, consequential re-investment for out of date, or non-existent, critical business technology and – will adjust their acquisition pricing, terms and conditions accordingly.
5. Freedom to take a Vacation – Anytime:
That’s right… anytime. The ability for a owner/operator NOT to be needed in the day-to-day business operation only adds more value to a company. The potential owner now has the option of being an “arm’s length” business manager, or a daily hands-on operator; and with that flexibility – the universe of possible buyers increases and the value of the enterprise is maximized.
Remember, just like “beauty is in the eyes of the beholder”, the value of a company is in the eyes of a buyer. Different types of buyers – will value companies differently. The more types of buyers affected and engaged, the more potential value for an entity. Prepare your company and yourself.
Successfully addressing these five critical areas over time makes your business more valuable and much, much easier to sell to a larger universe of potential buyers.