two professionals in a meeting going over paperwork
From drafting a timeline and planning for your eventual sale to understanding the state of the economy, there are several things to research when planning to sell a business. — Getty Images/nortonrsx

If you could create your own fantasy Board of Directors who would be on it? CO— connects you with thought leaders from across the business spectrum and asks them to help solve your biggest business challenges. In this edition, we ask two experts how to get ready to sell a business.

There are several reasons small business owners decide to sell their companies — they want to move to another city or state, sales are down, they’re looking for a new challenge or it’s time to retire.

Whatever the reason, once you decide to sell, you can’t just hang up a “for sale” sign and wait for the offers to come rolling in. Selling for the right price takes time and preparation.

Luba Kagan, manager of business development and strategic partnerships at BizBuySell answers…

The more time you take to properly assess, prepare and market your business for sale, the higher the probability of maximizing the transaction’s success.

Deciding to sell

The reason you’re selling your business is the most fundamental question you need to answer — for yourself and for buyers — since it’s likely this will be one of the first questions a potential buyer will ask. Define why you are selling and what you would consider a successful outcome. Assemble a team of advisors when you are contemplating a sale, including your family, trusted friends and the professionals (accountant, lawyer, business transaction advisor), etc.

Preparing for sale

When a buyer is evaluating your business’s price/value, they likely will use standard industry methods such as multiples of earnings and sales to arrive at a purchase price. If you’re thinking of selling in three or so years, start reporting your earnings with this in mind. Yes, you may have to pay more taxes now, but if your business is getting bought at 2-3x earnings, it’ll likely be worth it.

Increase profitability

Investors want to buy profitable businesses, so look for places where you can reduce costs and create efficiencies. Then consider creating additional revenue streams. (See more below.)

Establish processes

Creating and documenting regimented processes, which enable the company to function without your involvement, puts buyers at ease. You need to convince potential investors the business will continue to run smoothly long after you’re gone.

Cultivate a loyal workforce

New owners don’t want to deal with employee turnover. Experienced workers bring stability and help generate sales and profits.

Identify and highlight tangible and intangible assets

As you get closer to your targeted sales date, list and price all your business’s physical assets, including furnishings, fixtures, equipment and inventory. Also, consider the value of your intangible assets — things like contracts and agreements, customer relationships, brand recognition and more. Every non-material asset that contributes to your company’s profit line has the potential to boost its price.

“Be” the buyer

Price is important to the seller; terms and conditions are important to the buyer. You may be able to get a higher price if you provide the terms and conditions the buyer wants.

Put yourself in the buyer’s shoes. Do whatever is possible to enhance your company’s value. Make sure your financial records are current and accurate. Is your store/office/restaurant/facility looking its best? Tie up any loose ends. Buyers prefer businesses that come with low risks and high rewards.

Pivot to areas of opportunity to position your business for future growth.

Bob House, president, BizBuySell

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Bob House, president of BizBuySell answers…

Create a timeline

In “normal” times, three years is a reasonable horizon to prepare for a sale. It’s enough time to build profitability and allows you to get ready for the transition. If you want to get the maximum return, you need to show growing revenues and profits over several years.

Effects of COVID-19

But these aren’t normal times. Depending on your circumstances, you might want to move up your timeline. The coronavirus pandemic changed everything. If you can’t pay your rent, a three-year timeline won’t work.

In general, buyers don’t want to take on risk. Currently, buyers are looking for deals, and you’re unlikely to get top price. But if you can wait, three years from now, it’s likely the pandemic will have bottomed out.

Once you remove the uncertainty from the market, prices will go up. And once the economy starts growing, it will be a better environment for selling a business.

Identifying areas of opportunity

Take a look at your business. Some companies are thriving, temporarily. Hardware stores, for example, are benefiting from homeowners stuck at home undertaking home improvement projects. Since that won’t likely last long-term, is now a good time to sell?

Pivot to areas of opportunity to position your business for future growth. What trends will stick? In the food business, some struggling companies have found success pivoting to developing ghost kitchens, adding curbside pickup and outdoor dining, and selling groceries in addition to meals.

However, if you look at the current Economic Average Report from Yelp, it shows nearly 100,000 businesses have permanently closed. If you’re in an “endangered industry” and you’re still solvent, you may want to sell now.

Finding buyers

Most business sellers are baby boomers. Three years from now, the older millennials will be in their 40s eager to strike out independently. These buyers will be looking for businesses with proven cash flow. They want to buy businesses they can improve and grow the ROI.

Consider the following points moving forward:

  • Hold on. If you can wait it out, the business sales environment will be much improved in three years.
  • Pivot. Find ways to add revenue to your business; create new products/services; find new sales channels.
  • Adapt. Identify what has worked for you during the pandemic and decide which of those practices will continue to add value to your business.

Bottom line

To prepare for an eventual sale, you need to grow revenues, improve profit margins and gain a competitive edge. Then, when it comes time to sell, your business will be more attractive to buyers and command a higher price.

You will need some specific documents during the sale process, including:

  • Non-disclosure confidentiality agreement
  • Personal financial statement form for buyer to complete
  • Offer-to-purchase agreement
  • Note for seller financing
  • Financial statements for the current and past 2-3 years
  • Statement of seller’s discretionary earnings or cash flow
  • Financial ratios and trends
  • Accounts payable and accounts receivables aging reports
  • Inventory list with value detail
  • List of fixtures, furnishings and equipment with value detail
  • Asset depreciation schedule from tax return
  • Supplier and distributors contacts
  • Client list and major client contracts
  • Staffing list with hire dates and salaries; employment agreements
  • Organization chart
  • Photos of business
  • List of opportunities for improvement with revenue/profit projections for each
  • Business formation documents
  • Corporate or Schedule C tax returns for past 2-3 years
  • Building or office lease
  • Equipment leases and maintenance agreements
  • Business licenses, certifications and registrations
  • Professional certificates
  • Insurance policies
  • Copies providing ownership of patents, trademarks and other intellectual property
  • Outstanding loan agreements
  • Description of liens
  • Products/service descriptions and price lists
  • Business plan
  • Marketing plan and samples of marketing materials
  • Employment policy manual
  • Business procedures manual
  • Other documents unique to your business

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published September 30, 2020