Thinking of selling your business? Make sure it's well groomed
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One of the keys to finally obtaining an equitable price for your business at the time of sale is to actually start thinking about the process well in advance. As with most projects, the quality of the preparation in large measure determines the quality of the results. In fact, it’s not uncommon to see figures of 3-5 years prior to sale time suggested by advisors as a necessary lead in time to properly prepare a business for sale. Preparation involves a combination of many factors, some of which are so obvious they very often get overlooked by the intending seller – but won’t be by the buyer or their advisors. An obviously well prepared sale will also instill trust and confidence in the potential buyers as they kick the tires. In this part we’ll cover the main things you can be doing to present your business in its best possible light – the process of grooming the business for sale. |
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To get the best price for your business and minimize the sale period follow the golden rules: |
Grooming A Business For Sale
Grooming for sale is definitely not about just window dressing your financials and tidying up the premises in an effort to fool prospective buyers into believing you have an organized, well managed and efficient operation when, in fact, its no such thing.Buyers, or their trained agents, will easily discover that’s just a facade and the moment they start to doubt your integrity you have lost their trust. You can kiss that sale goodbye.
On the contrary, what grooming is about is ensuring that your business activity is driven by attention to good, basic, business fundamentals – in other words, in creating an organization which is attractive enough to prospective buyers to convince them it is worth paying top dollar for.
Grooming for sale, and encouraging buyer trust and confidence, comes down to being able to present the business at its best in four areas:
1. You must demonstrate a solid financial performance along with the records to substantiate your valuation figures.
2. Systemize your business processes so day to day running isn’t dependent on your personal involvement.
3. Take steps to identify and protect your intellectual property and get all your physical assets into presentable condition.
4. Minimize the uncertainty factors a buyer will see as risks in taking over the business.
Demonstrating Solid Financial Performance
Forward planning will ensure that, when the time comes, your business looks like a financially attractive proposition. And while it’s true that financial data alone will not allow buyers to recognize the full opportunity your business represents for them (for instance high quality clientele and favorable supply contracts don’t show up as such in the financials), historic financial data is usually the first information to be exchanged.
Financial records and controls
The first step is to ensure that your financial record keeping itself is in good order.
Good financial records indicate the company has control of its accounting and financial operations. How frequently you prepare financial statements depends largely on the size of the business but a minimum should be quarterly. And you should have those records for the current and previous 3 years minimum.
Financial records, to be most convincing, should consist of more than just the profit and loss statements and annual reports. Providing budgets and forecasts, particularly if they predict expected growth of course, can increase a prospect’s confidence – there’s nothing like a record of steadily increasing sales along with positive sales forecasts to do that.
If possible, your financial performance should be reasonably stable throughout the year. You may be able to bring forward or delay purchases and sales to help with this. You may also want to change some of your accounting practices.
Review your accounting practices
Most closely held businesses manage their finances to minimize taxes as opposed to showing increasing earnings. That means your books may not be reflecting the true business value.
There are a number of strategies an accountant or business advisor can investigate to provide a more accurate picture – such as expensing less aggressively, by capitalizing equipment purchases and repairs to buildings or equipment and by reducing the amount paid out in salaries to the owners. Those are by no means the only possibilities – it will depend on your particular situation.
Depending on your lead in time to sale you may decide on a strategy of maximizing your profit in the short term. One way of doing that is to reduce the types of investment you would normally have made to achieve long term sustainability – for instance by reducing the spend on marketing or not employing any new personnel. You can also sell underutilized equipment to reduce debt.
Reviewing areas for possible cost cutting across your operations can provide some gains in your profit figure - such as renegotiating supply contracts and eliminating unnecessary perks.
Inventory management can be a significant factor in improving the financials. Holding too
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Prospects will be impressed that you are not holding any unsellable stock and it will eliminate any possible arguments over the valuation of such stock during the sale. |
Look broadly and deeply to determine any areas in which you can improve your capital position –can vendor contracts be renegotiated to obtain volume discounts? Are there alternative utility companies offering a better deal than you are getting from your current one? Similarly with banks and insurance companies. Could outsourcing certain operations result in lower costs? Would a tighter credit control policy make the cash flow situation look better?
The point is, there are numerous opportunities to decrease costs and enhance revenues.
There is a proviso – and its why professional advice is useful in making many of these decisions – any cost cutting needs to be done with a realization of any potentially negative flow on effects – they must not be allowed to compromise the very operational integrity and quality of the business who’s value you are trying to improve. Assets and inventory need to be maintained at normal, reasonable and appropriate levels – but most businesses still find there is room to improve on their current performance.
During this period of preparation you can also look at reducing discretionary business expenditures. Although a professional business appraiser will adjust the business cash flow to account for discretionary expenditures, the typical buyer views a dollar of net income more favorably than a dollar of adjusted cash flow.
The kinds of discretionary expenditures targeted can include entertainment, travel, memberships and any above market salary the business owner pays himself or family members. This is a good time to evaluate the business’ insurance coverage. Many small business owners carry large life insurance policies on themselves and family members that could be shifted from payment by the business over to personal accounts. If the seller owns real estate or other assets and leases them to the business, the rental rates should be adjusted to reflect current market rates.
Your financial records are going to take intense scrutiny and its best to have them based on realistic data – ultimately a buyer has to believe they really reflect the reality of your operations. Unrealistic provisions for bad debts or depreciation, exaggerated stock valuations, optimistic sales projections, below market rental rates – these aren’t going to pass the attention of a trained accountant during the negotiations and to be caught out on them, even where they were oversights, will severely erode your credibility with the prospect.
Management Practices
One of main concerns of a prospective buyer of an SME is that when the owner walks out the door so will most of the accumulated knowledge about how it operates on a day to day basis.
Unfortunately, it’s so common for owners to be working IN their business rather than ON it that that is exactly what happens – they haven’t trained up employees, documented the procedures or delegated responsibilities. A buyer who walks into this situation could be faced with chaos and need to invest a lot of resources in keeping the business on track while they developed their own ideas on how things work.
Streamline your business operations
It will pay to invest time now in getting your business in shape. When you step out it should be able to continue running smoothly – whether that stepping out is for a holiday, because you have hit an illness or when you sell.
That means developing and recording the common procedures – AND training your employees in how they work. The number of decisions that can be made only by you should be minimized and, with proper planning, decision making shouldn’t always seem like a crisis situation.
A few basic policies can make a major difference to the amount of time and effort a manager needs to put in – you could start with things like policies on your credit/collection practices, on inventory, on fixed asset additions/dispositions etc. These systems and procedures do not have to be sophisticated; they only have to be effective and communicated to those responsible for the respective duties and responsibilities.
When you have all the various functions within your business systematized and thoroughly documented, delegation is no longer such a problem. Each person should have a clearly defined role, a chain of command, and a designated set of tasks and procedures which, when carried out competently, leads to measurable and desired outcomes.
A buyer can then see himself fitting comfortably into a working process.
Document your business strategy
At a level above the day to day operations it would be advisable to put in place more strategy oriented documents - a business plan incorporating a clearly defined strategy for the business, an organization chart, budgets, and sales forecasts for instance. Again, these will engender confidence in the prospect about how transparent processes are and how easy it would be for them to take over the reins.
What you don’t want them to see is a person who isn’t so much running a business as performing a very demanding job with no letup. They’ll no doubt see why you want to sell! But will they want to buy into that sort of workload and pressure? The more confidence you can generate in a buyer that the business is well run, the higher the price they are likely to offer.
Get Your Assets In Order
Just as with selling anything else, the first impressions a prospective buyer has of your business will count. There are a number of practical steps you can take to create a good first impression with a prospect, many of them simple and inexpensive but not noticed because of years of familiarity with the way they look. You need to stand back and look at the business premises and its assets through the eyes of the prospect.
Make it look good
Doing some housekeeping is a good place to start. If the paintwork is shabby, employees are falling over empty packaging cases, machinery is leaking oil, the sign out front with your business’ name on it is weathered, neon lights are flickering and the washroom sinks are greasy – tidy them all up.
Identify all your assets
Try to identify and value the business' intangible assets such as any proprietary products, its distribution network, how well its name is recognized in the market and so on. These things may be ‘intangible’ but in fact they can account for a lot of goodwill among customers and your market share and unless you recognize them, take steps to protect ownership of them and include them among your valuation points, then you stand to lose the benefits of having worked to achieve them in the first place.
Of these factors arguably the most important is the existence of proprietary products or services. If your business has proprietary products or services then protect them by filing copyrights, trademarks or patents. A corporate name alone is insufficient to protect a brand.
Given the choice of two businesses, one of which is well maintained, orderly and clean and one of which is not, which one do you think the prospect will choose? Buyers will recognize your pride in ownership and assume it is likely to demonstrate your attitude to how you do things in the rest of the business as well – that it will shine not just on the surface but down at management level as well.
Make The Business Less Risky
Among the greatest obstacles to selling your business will be the fear and uncertainty your prospects could feel over the sheer risk they are taking. Its not only about whether they can take it over and run it – its also about just what skeletons in the closet they might happen across sometime in the future that will mean expense and trouble for them. The due diligence process will answer their concerns in part, but there are other areas where you can build in safeguards for them that will give them a strong sense of confidence.
Formalize relationships
Start by trying to turn those informal arrangement s you have with customers and suppliers into more formal ones – preferably contracts.
Your verbal or handshake agreements with suppliers will look very flimsy to potential buyers. They’ll be concerned that a change in ownership might be seen by the supplier as an opportunity to renegotiate to terms more favorable to them. A written contract you can show the buyer will inspire a lot more certainty.
It’s the same with customers and other key parties like unions, government regulation agencies, landlords and industry trade organizations – any written agreements that show your outlets are secure, that the lease arrangements will be secure and that the business is in compliance can only increase the prospect’s confidence that revenue flow will be secure and trading continue unhindered.
Reduce dependence
If your business is dependent on a few large customer accounts or just one or two key suppliers then that will be perceived as a risk by the prospect. Customers can evaporate and suppliers can turn the screws hard when they know you can’t go elsewhere for supply. That makes the new owner very vulnerable so during your preparation period aim to reduce your dependence on too few customers or on one or two key suppliers.
Secure key employees
Many business owners will say that their most valuable asset is their people. It’s important to have a strong management team – that demonstrates the business will run well when you leave. But its just as important to be able to convince the buyer that those key people will be willing to stay on.
You might encourage key employees to stay by considering appropriate incentive schemes.
Clean out the skeletons
For the sake of making the sale go faster and smoother its best to clean up any issues that a prospect is going to be wary of taking on. For instance, settle any outstanding legal cases or tax disputes. Where intellectual property is part of the deal, make sure you have clear ownership of what you claim rights to.
As well, you can remove a lot of the surprise elements upfront before prospects discover them for themselves – for instance the type, value and transferability of the business’ retirement benefits schemes for employees can have huge implications for the buyer. Putting together a documented picture of the current scheme and the business’ liability again demonstrates your commitment to honest and transparent dealing with prospects.
Using Advisors
All that will be hard to organize by yourself – this is a case where to make money it could be well worthwhile spending some money on professional advice about how to achieve the financial and operational level that will make the business attractive.
Retaining competent, professional advisors is a critical step in setting up a timely and rewarding business sale – not least for the grooming suggestions they can provide.
SELLING AND GROOMING ISN’T JUST ABOUT NUMBERS
Interestingly enough it’s a firmly held belief among business agents that it’s not the numbers that actually sell a business. Buyers are looking for opportunities the business might open up for themselves. Constant effort to improve the numbers is important – and a lot of grooming activity is aimed at doing just that, as well as getting your financial record keeping in order to defend the value you have put on the business. But presenting a well organized operation that is reflected in a concern for how it appears to people and a set of backup documents that focus on key risk issues – and removes them – can be just as important.
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By being organized, business owners can make it easy for a potential buyer to do their due diligence and decrease the likelihood of them actively looking for problems. It’s all part of grooming your business for sale, and it pays off. |
