1. What can I do to prepare my business for sale?
There are several things you can do help improve the value and salability of your business, including:
- Improve your financial performance.
Sales and profits are two key elements that buyers look at when they are evaluating a business for sale. Buyers are hesitant to purchase a business when sales and profitability are on the decline. So, once you've decided that you're going to sell your business, it's imperative that you continue to focus on running that business.
- Make yourself replaceable.
Yes, that's correct. To maximize the value of your business, you have to disassociate yourself from the business. You need your customers, employees and suppliers to sign on because of the company, not because of you, the owner. Train your right-hand person to be able to take on your responsibilities. The more structure you have in place, including a strong management team, the more valuable your business will become.
- Replace or eliminate any family members who are working in the business.
You may have some family members working in the business that are very productive, and you may have some on the payroll that are in fact absentee. While you may enjoy working with your family, many buyers may consider it a problem. Even if they are productive and willing to stay after the sale, a buyer might think he is not getting the most qualified person for the job.
- Reduce the personal perks and expenses that you've charged to the business.
Many small and mid-sized business owners charge considerable personal or other non-essential expenses (health insurance, auto insurance, spouse's auto or mobile phones, meals, entertainment, travel, etc.) to the business in order to minimize the owner's tax burden. Eliminating or at least documenting these non-essential expenses will usually greatly increase the profitability and market value of the business.
- Sell off any unnecessary assets or obsolete inventory.
Buyers don't want to pay for assets that do not contribute to the profitability of the business.
- Develop and document your sales and marketing program.
Most buyers will want to fully understand how customers are acquired and sales are generated. They also want to be comfortable that after you exit the business, your customers will stay and the sales will continue. Why? In many businesses, the owner is the "rainmaker." Therefore, you need to be able to show the buyer how that rainmaking function can be transferred.
- Expand and diversify your customer base.
Buyers don't want a business that is totally dependent on only one or two customers. Having a diverse customer base reduces the impact and risk of losing a customer. In the best case, the largest customer a business should have should account for no more than 20% of the total business.
2. How will my business be valued and priced?
Many business owners make the mistake of asking their tax accountant or other local associates what the business is worth. There are two serious problems with this.
First, most local tax accountants are not qualified to do business valuation. These sources often rely on generalized rules of thumb including average percentage of sales or earnings multiples.
Professional business valuation is a specific skill that requires extensive knowledge and experience.
The second, and most important point, is the key phrase "independent third-party appraisal." Even if their accountant is fully qualified, it is still not a third-party, arms length relationship.
One of the first questions buyers ask is "How did you come up with the price?" If the answer is "My accountant, my friend or my broker came up with it," then the business valuation is immediately suspect and devalued.
If the answer is "We had an independent third-party appraisal done by a nationally recognized valuation company that does nothing but business appraisals," then the buyer usually accepts it. If the buyer doesn't, then he or she has a very hard time refuting it.
A professional third-party appraisal should be completed to determine the Fair Market Value of the business, and recommend terms and deal structure based on industry norms. This Market Value Analysis will substantiate and justify the purchase price to both buyers and lenders.
3. How will my business be "packaged" for showing to prospects?
Buyers need a reasonable amount of information to make an informed decision about buying any business. Normally, they will require all important information about the business and the industry. Historical marketing, operating and financial data should be analyzed and properly presented in a professional format.
A competent broker will prepare a Confidential Memorandum to organize and present all vital information about the business to qualified buyers. This professionally prepared document typically includes 10 to 20 pages of descriptive and financial information. Beware of brokers who only put together a few pages on a listing form.
4. How will my business be marketed to attract potential buyers?
A good broker will engage in meaningful marketing activities to generate interest in your company. A Generic Profile of the business is used with various media to reach all potential buyers. Media typically used includes the internet, direct mail, newspapers, trade journals and other channels as appropriate for the business and industry. This process attracts all types of buyers including individual buyer-operators, corporate acquirers and private equity groups.
5. How will my confidentiality be protected throughout the process?
Confidentiality is the number one concern for most business sellers. The broker should be prepared to protect your privacy from the moment that you first make contact. You should be able to specify the best phone number to contact you at and what time is best for to call you.
The broker should sign a confidentiality agreement with you, the seller. And the broker should insure that all potential buyers sign detailed Confidentiality & Warranty Agreements before any information about your business is given out.
6. How long will it take to sell my business?
How long it takes to sell a business depends somewhat on the size and type of business. No two businesses are alike - even in the same area and industry.
Small businesses can sell fairly quickly - usually within 4 to 6 months. Larger business can take much longer, as much as 8 to 12 months to find the right buyer. Some specialized businesses or those with a specific issue may take as long as 18 months to sell. And if the business is not professionally packaged, and valued using an independent third-party appraisal, it may never sell.
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Selling your business isn't something you do every day. Don't you owe it to yourself to have a professional business broker guide you through what could be the most important transaction of your life?
Call Lou Pereira today at 603.890.6628 or contact us directly via e-mail.
