6 Questions Business Owners Should Answer Before Selling Their Business
The sale of a business is one of the more involved and complex processes a business owner can ever experience; and, in most cases, there is little margin for error.
There can be many second chances to overcome mistakes in building a business; however, it is rare to get a second chance when selling a business. If you are ready for an exit, here are six questions you should answer before selling your business.
1. Is My Business Sellable?
Owners need to take a long look at their business through the eyes of a potential buyer and ask the question, “Would I buy this business?” Buyers look closely at a number of factors:
Profitability. Buyers are most interested in the bottom line. Is the business profitable and what is its forecast for future growth?
Solvency. Buyers would prefer to buy businesses in which its assets far exceed its liabilities. If there are liabilities, they need to know that there are enough revenues to cover the debt payments.
Market Position. Buyers like buying winners – businesses that have a strong market position based on a strong branding, product differentiation, innovation, and market share.
Employees/Management. Buyers typically evaluate the experience and skills of employees and management. Key employees can be especially important to buyers when assessing the value of the business as an ongoing concern.
Customers. In the eyes of a buyer, your business’s customer base is its most valuable asset. Buyers consider its size, diversity, retention and its growth potential. If it is too concentrated among a few big customers, it could be considered a high risk.
2. What’s My Business Worth?
Most business owners have no idea of how much their business is worth and many wait until they are ready to sell before trying to put a price on it. Those who do keep score tend to be overly optimistic in their own appraisal. A successful outcome is one in which the sale of a business yields sufficient proceeds to allow the business owner to exit with enough funds to provide a secure retirement.
It’s important to have a professional valuation appraisal done periodically to know where you stand and pinpoint what needs to be done to increase the value of the business. Ultimately, it’s not a business appraisal that sets the price; it’s what a buyer is willing to pay. So, it’s important to always view your business value through the eyes of a buyer.
3. What’s My Exit Strategy?
Essentially, your exit strategy is determined by your sale objectives. For example, if your objective is to keep your business in the family, your exit strategy is likely to look a lot different than if you were to seek top dollar from a third-party buyer. Your exit strategy becomes the blueprint for all planning decisions. While no two exit strategies are alike, they all contain the following elements:
- A target date for exiting the business
- A plan to maximize the value of the business
- A tax-efficient plan for transferring wealth from the business to your investment portfolio
- A plan for managing the business during the sale process
- Determining the business owner’s role during the transition and following the transfer
- A financial plan that ensures the financial security of the owner and his or her family
4. What Steps Can I Take Now to Increase the Value of My Business?
Taking the perspective of potential buyers and understanding the key factors they consider in evaluating your business, you can focus your efforts on the aspects of your business that impact its value.
Increase Cash Flow. Cash flow is a primary consideration for potential buyers – the more your business generates, the more attractive your business. Factors to consider include: thoroughly reviewing your operations for inefficiencies; reviewing your bank’s cash management department’s receivables and payables process to find ways to automate them to increase cash on hand, and paying down debt.
Increase Revenue. A business that can show increasing revenues is much more attractive. Have you expanded marketing efforts to reach new markets? Are you updating sales campaigns to include higher incentives for salespeople? Have you taken on a business development specialist, or outsourced this function?
Make Yourself Expendable. The best indication of how well-oiled your machine is how expendable you are. A business in which the managers and employees don’t even know if the owner is around is more valuable than one that requires the owner to be in on every decision.
Get Your House in Order. Businesses with too many outstanding issues can complicate a sale. Now is the time to review leases, employee contracts, outstanding regulatory issues, and vendor contracts to ensure they don’t become an obstacle.
5. Who Do I Need on My Team as I Go Through the Process?
One of the steps business owners must take when considering selling their business is to surround themselves with trusted advisors who have the specialized knowledge and experience in business sale transactions.
Financial Advisor. Business owners will need the services of a qualified and competent financial advisor to help prepare for the transaction and manage the financial aspects of transitioning wealth from the business to an investment strategy. Pre-transaction planning is critical in determining the net-net number business owners needs from the business to live the life they envision. Post-transaction planning considers the implications of the transaction on the owner’s taxes, estate, and philanthropic desires — all with the objective of maximizing sales proceeds.
Business Intermediary. The role of the business seller intermediary (business broker or investment banker) is to guide you through the sale process. The right business intermediary understands the market and can take on the tasks of due diligence, writing the memorandum, finding qualified buyers, narrowing he filed, negotiating terms and closing the deal.
Attorney. You will need an attorney with specific experitse and experience to evaluate letters of intent, writing and enforcing non-disclosure agreements and writing sales contracts. If your current legal counsel doesn’t have experience in business sale transaction, he should be able to refer you to one.
Accountant. The tax implications of selling a business can be complex, so you will need a CPA well-versed in business transactions. A CPA also assists in the valuation of the business and structuring the deal for tax advantages.
6. How Do I Manage My Company During the Sale?
In most cases, the primary cause of deteriorating business performance prior to a deal is the management team focusing its attention on the deal rather than business.
It is critical for business seller to ensure their business is running optimally and meeting forecasts during the sale process. As part of the process, they should establish clear assignments for management, and hold them accountable for meeting forecasts.
Communicating with employees. One of the more challenging aspects of the sale process is determining the best time to communicate the sale to employees. Any premature leaks of the sale can result in anxiety and low morale among employees. Key people and management staff who are critical to the on-going operation of the business need to be told by the time a qualified buyer if found because they are likely to be a subject of due diligence conducted by the buyer.
Maintaining confidentiality. Of all of the things that can go wrong in the selling process, the inadvertent leak of information can be the most damaging. The most essential rule of thumb for business sellers is to never tell anybody who doesn’t need to know; and when the need to divulge any aspect of the idea or plan to anyone arises it shouldn’t be done unless a non-disclosure agreement has been signed.
By taking the time to thoroughly address each of these questions well before selling your business, you will significantly enhance your chances of a successful outcome. In essence, the carefully conceived answers to each of these questions become a step-by-step guide in developing your blueprint for success.
About Venturi Wealth Management
Venturi’s core mission is to help organize, plan, and manage all aspects of wealth for families and entrepreneurs with substantial assets and complex business and personal financial lives—so you can focus on doing the things that matter most to you. We manage more than $1 billion in assets, a significant portion in house, often eliminating additional layers of management fees. Founded in Austin, Texas, Venturi incorporates the city’s entrepreneurial energy into everything we do for our clients.
Partnering with the right people to help manage your financial livelihood is not a small step. The issues are complex. You may want to use an advisory firm to hold guide you through the process.