What you need to Know to Sell Your Business
By Dennis Zink
June 4, 2019
OKAY, YOU MADE THE decision to sell your business and no one has put a gun to your head. You want to maximize your equity upon sale. What should you do? And just as important, what shouldn’t you do?
The following advice on How to Sell a Business is from Norman Silverstein. Mr. Silverstein was has been a business broker and his primary expertise has been assisting buyers and sellers of small to mid-sized businesses. He owned his own business brokerage company for over 10 years, eventually merging it with another company. Having completed hundreds of business sales transactions, Silverstein is experienced in mergers and acquisitions, business valuations, performing due diligence, determining the real cash flow of a business, and everything that it takes to bring buyers and sellers to the closing table. Norm has been a SCORE certified mentor since 2012.
From my recent column on, “Six strategies you can use to EXIT your business” we will use strategy #2: Sell to a 3rd party to maximize your equity. Here is some advice from Silverstein on how to do just that.
- Prepare your business for sale. Do come up with a purchase price. Placing a market value on a business will be the most important and perhaps the most difficult part of the selling process.
- Don’t overprice your business. Business owners often have misconceptions concerning the value of their business, believing that it is worth more than the market value. Owners tend to be too emotionally involved in their business, having spent a great deal of time developing it.
- Do prepare a business presentation package. Prospective buyers will make the decision to purchase a business based on the potential future upside. They will establish a price based on past and current performance.
- Regardless of formulas and multiples to arrive at a price, one important fact remains true: A business is worth what a seller is willing to accept from a buyer.
- Do have accurate current and historical financial information available (at least three years). This financial information should be recast to show the true profitability of the business, including owner benefits.
- Do account for any cash in your business. Unless you can prove your receipts, don’t expect to get paid for them. If the selling multiple is three that means every $1 you cannot prove receipt of will cost you $3 in equitable value.
- Market your business. Consider hiring an intermediary (business broker), rather than selling your business yourself. Use a business intermediary that already has contacts within your industry.
- Don’t advertise on websites that specialize in businesses for sale.
- Maintain confidentiality. Don’t tell your employees, suppliers, creditors, landlord or customers until you have a signed contract and need to tell them.
- Show the business. Show the business after hours, and make sure all employees are out of the facility. Do not introduce the potential buyer to your employees.
- You need to make a good first impression. Make sure the office or workspace is clean and well organized, and that the facility has good curb appeal. If necessary: paint walls, replace carpet and furniture. Make sure the parking lot is clean, your business signs look new, and your warehouse or storage room shelves are numbered, neatly laid out, and well organized. Make sure all desks are neat and orderly, and list personal effects that will be retained by the seller.
- Vet the buyer. Obtain a credit report and personal financial statement, especially if financing is included.
- Get an appraisal, if requested by the buyer, for furniture, fixtures and equipment.
- Be able to defend your asking price and know how it was derived.
You may decide to sell at a later date. If so, the following will help increase the value of your business.
- Make any improvements needed to make a good first impression when you show the business.
- Increase your sales annually. Develop a strong sales force (if applicable), and diversify your customer base by size, quantity and geography. Avoid an erosion clause that would lower your price if an important key customer leaves.
- Replace family members and let go of unproductive employees.
- Develop an organizational chart, a strong management team and learn to delegate. Don’t become too dependent on any one employee.
- Have written procedures for operations (employee manual).
- Report all cash received by the business.
- Sell off unnecessary assets and reduce unnecessary large purchases.
- Keep your account receivables higher (shoot for 2x or more if possible) than your account payables, and don’t have account receivables higher than 30-60 days.
- Remove yourself from the business and reduce the amount of owner perks.
Develop and/or improve the company’s website, keeping your technology up to date. If you need help with this, I may be reached at dennis@Time4Exit.com