How To Increase Your Chances of a Higher Return When Selling Your Business
By Dan Fries
There often comes a time to move on. Selling a business can be an involved process, nearly as intense as building one, but by properly managing passions, preparations, and paperwork you can increase your chances of a higher return when selling your business.
Owning a business is an integral part of the American dream. Perhaps you inherited a family tradition, followed an inspirational idea, or simply saw an opportunity to reap great rewards: whatever the story, there’s nothing like being your own boss.
Whether selling out of financial necessity, life changes, or a desire to tackle new challenges, there are certain steps all business owners should follow to maximize a business’ market value. From laying the groundwork for a graceful exit to ensuring the legitimacy of numbers and maintaining core focus, you’re going to need guidance and assistance.
Let’s take a look at the best practices.
Make an exit strategy
Prepping a proper exit strategy is a step that might require a time machine, as it is one best taken long before actually entertaining a sale. Conditions triggering the sale of a business are often anticipated (or even defined) long before bids are solicited; it might be a planned retirement, the death of a partner, the encroachment of a competitor, reaching a targeted value or receiving an irresistible bid.
Just as you lay out budgets and strategies ahead of time, planning an exit provides stability that tends to tame chaos, but even without such prescient preparation, there are time-tested procedures and professionals that will help you navigate the sale.
If you possess the time and foresight, thinking through these scenarios and preparing yourself psychologically and logistically can remove much of the guesswork and emotion when it comes time to pull the trigger. By avoiding surprises and desperation, you can also choose the best timing and await the right offer, thus increasing your return.
Determine an accurate value
The need to establish an accurate value before taking your company to market may seem obvious. But it’s also no easy feat, and likely the most critical tip to know before selling your business.
Every transaction requires a seller to set a reasonable, accurate price – too high and they attract no interest, too low and money is left on the table.
A fair price point is especially important when parting with a treasure that’s played a large part in your life, and especially difficult under such circumstances, as sentiments might infringe on perspective. Valuing a company is a complex process dependent on myriad factors: revenue, overhead, market share, growth (recent and potential), infrastructure, assets, reputation, and intellectual property, just to name a few.
To properly consider all such aspects while divorcing emotional attachment, it’s strongly advised that business owners enlist the aid of a qualified appraiser. Professional appraisers boast experience weighing all elements of your company and the market, but won’t be influenced by personal involvement.
If the business is small enough or you believe yourself qualified, you can always perform the valuation yourself. This isn’t recommended, but if you do go down that route be certain to familiarize yourself with generally accepted accounting principles (GAAP) which prescribe valuation by one of three methods:
- Cost approach: Detailing investment to-date expended in building up the enterprise, and what it would cost to replace it. This approach is better-suited to real estate than ongoing concerns, but can emphasize the history and sweat equity of your endeavor;
- Market approach: Form of relative valuation that analyzes market conditions and similar transactions in the field — helpful if you are in a hot sector with a number of comparable closings;
- Discounted cash flow approach: This approach can be the simplest method (merely multiplying net cash flow by 3-6x) or the most complex (plugging current financials into complex predictive models to determine future worth) depending upon your preference and mathematical acumen.
Regardless of the valuation method selected, it’s essential to have financial information in order to aid in the calculations and supply credibility to the conclusions.
Organize your accounting process
If you’ve been running an operation in good standing, hopefully your books are already in order, but what is satisfactory to you and presentable to others may not be quite the same thing.
Getting your financials in order is a critical task ahead of sale, and one on which many other steps rely. Clean accounting allows more accurate appraisal, instills more confidence in buyers, and helps clarify debts, taxes, and outstanding balances that will comprise parts of the final agreement.
You’ll likely need to provide at least three years of tax returns along with financial statements detailing balance sheets, income statements, cash flow statements, etc.
In the digital era, handing over ledgers filled with bad handwriting and eraser marks is highly unimpressive. Reassuring professionalism is best conveyed by numbers tracked in high quality accounting software, which not only documents past performance but lends additional appeal and value. Investing in digital asset management services can be essential for this reason.
For example, modern accounting software is affordable, cloud-based, and comes with several critical features that clearly track invoices, expenses, estimates, taxes, projects, payments — keeping your financials clear and putting reports at the tips of your fingers to present when it’s time to sell.
Once you’ve compiled the numbers and put them together with compliance reports, business plans and marketing numbers in a descriptive selling memo, it’s time to determine how you want to go about the sale.
Choose a sales method
With marketplaces like Flippa, it’s now easier than ever to sell a business on your own, or if you want great support there is the option of enlisting a business broker.
When selling the company to a family member, a business partner, an employee group, or an investment group that’s come forward with an offer that you can’t refuse, you may wish to handle the minimal negotiations and paperwork on your own in order to avoid antagonism and brokers fees…but if you’re weighing offers and transferring the enterprise to an outside concern, you can also seek out professional help for greater support during the process.
For a reasonable fee, the right business broker will attend to most every stage of the transaction. They’ll provide an independent valuation, take care of all marketing and solicitation of bids, perform due diligence by vetting potential buyers, conduct good-faith negotiations, and even help secure financing to close out the deal.
Not only do business brokers provide turnkey services to make your transition easier, in cases involving niche business models, they can supply specialized insight and experience. This is particularly important with online businesses, where physical assets may be negligible but brand awareness and market fertility are supreme.
Then again, perhaps a broker’s most valuable benefit is freeing you to keep focus on the business and maintain maximum value right up to the point of sale.
Maintain your operations
Often a business is on the market because its owner is burned-out from the grind, or in some cases an owner may mentally check out of day-to-day management once they’ve decided to sell. In either situation the company suffers in its waning days just as it needs to shine most, ultimately hindering the price you can get for your business.
Keep up your infrastructure, continue pursuing sales. If your business features a website, be sure to clean it up and speed it up. Keep in mind that 40% of visitors will leave if your site takes more than three seconds to load. Increasing your site speed as much as possible will do much to improve its overall value. Your site is not only your front window to the world, but also the first face seen by prospective buyers.
Stay on the ball until the finish line, especially as the average business sale can take six to eight months to execute. Just as you repaint a house or polish a car when trying to find a buyer, ensure your business is looking it’s best as you come down the home stretch of the sale.
Selling your company can be a difficult decision, usually pursued because one wants (or needs) the money. Be certain to take every step towards securing the highest return possible. If an angel investor rains cash from the sky or you’re merely transferring control to a trusted associate, the transaction may be very straightforward. But if you’re selling on the open market, the process becomes a bit more complex.