Tip 6 of 12
Is it the right time to sell?
Many people wait till their business is on the decline to sell. That’s the exact opposite of what you should do. You want to sell when you are at the top of your game – peaked out. Some will say, ‘I’m making good money now. Why should I sell?’ That’s thinking like a business owner, not an entrepreneur.”
In a perfect world, the best time to sell a business is when the business is performing well, its financial forecast looks even better, the national economy is strong, and the industry is getting a lot of attention from Wall Street investors. However, regardless of the state of the economy or the industry, there are certain things owners can do to make their business as attractive as possible to potential purchasers.
Focus on building market value by addressing the following items:
Standardize and document all company procedures (SOPs);
Eliminate liabilities or liens and resolve any outstanding litigation;
Investigate the transferability of leases, sales and supplier contracts;
Perform maintenance on company equipment to ensure good operating condition;
Secure key employees with employment agreements;
Eliminate non-performing or non-contributing employees from the payroll;
Establish a management team that can operate without the current owner;
Spruce up the physical aspects of the business facility;
Reduce reliance on one or two large customers for most sales, and clean up your revenue; and
Have clean and verifiable financial statements for the last three years.
Improve free cash flow by taking the following actions:
Reduce unnecessary inventory;
Collect any outstanding receivables;
Renegotiate key supply contracts to more favorable terms;
Reduce personal adjustments on income statements; and
Ensure financial controls are established.
Owners should be aware that there is an inherent conflict that arises with running a business and preparing it for sale. Many businesses are run with the objective of minimizing tax liabilities. Unfortunately, the same techniques and accounting practices that minimize taxes also minimize the value of a business.
Ideally, plans to sell a business should be made three to five years in advance of the anticipated sale. This will allow adequate time to make changes and demonstrate a track record of maximum profits.
Set a future target date to sell the business, and answer the following questions:
Is the goal just to finance retirement?
Is it important that the son or daughter remain with the business?
Can tax benefits be gained by financing part of the sales price?
Should the new owner treat the customers with the same level of service?
Make a list of priorities and seek the advice of business professionals to ensure there are no surprises during the business transfer process.
Be proactive to protect confidentiality – Once a decision has been made to sell, a business owner should be conscious of the need for confidentiality. Any leaks about the sale of a business can cause panic and fear for the employees, suppliers, landlords and banks. Great care must also be taken to assure that competitors and customers do not learn of the planned sale.
Competitors may sabotage a business by leaking the information to employees and customers. Key employees may start looking for other employment. Customers could be concerned about how the business will perform under new management and may seek alternative sources for the product or service.
If any one of these were to happen, the value of a business could be significantly decreased. The name of the business and any detailed information should be disclosed only after it is determined that a potential buyer has the skills, experiences, financial capability and leadership required to run the business being considered. In addition, all potential buyers should be required to sign non-disclosure agreements stating they will maintain confidentiality on all information discussed.
In summary, focus on building market value and improving cash flow, prioritize the terms of the sale, seek the help of business professionals and maintain confidentiality.
Answers to these and many more questions can be found in The Exit Strategy Handbook. See Chapter 5, “Increasing the Value of Your Business,” page 57.
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