When you decide to sell your business, you have two immediate choices. Do you want to sell in the short-term, possibly making concessions for company weaknesses? Or do you want to delay the sale to address weaknesses and improve company value?
Preparing your business for sale first can result in a much higher valuation and sales price if you take the actions discussed below. We’ve been in the valuation game for over 20 years, so we have a pretty good idea of what you need before you sell. Here is your presale prep list:
Before all else, it’s critical to evaluate the state of the business. Your potential buyers want lower risk and high rewards. For each category, ask yourself if that aspect of the company is strong, adequate, or needs some work before a sale.
Review your financials quarter by quarter to see business trends and areas of concern. Check for:
- Is there a trend of increasing revenues?
- Are profits increasing?
- Is there a change in the percentage of profits or operating costs, reflecting greater or lower efficiencies and costs?
- Is the company cash flow positive, and are invoices collected on time?
- Have all taxes been paid?
- Are all debts paid and current?
- What are the current receivables?
- Have the financial statements been properly structured to reflect the company’s true or normalized earnings? I.e., Do the financial statements include personal or discretionary expenses, assets, or liabilities? If so, you should work towards removing these.
Market and Brand Value
- What is the brand image? Is it reputable and respected?
- Is the website attractive, effective, and ranking well on Google?
- What other online presence does the company have, and is it effective and regularly updated?
- Is the company well located?
- Do any business locations need any refurbishment?
- Are there effective associations with other reputable companies?
- Does the company have good word of mouth/referrals?
- What is the effectiveness of offline marketing?
Operations & Organization
- Is company equipment in good shape?
- How effective is the staff? Are there established benchmarks?
- Are operations, procedures, and systems well-documented?
- Is the business model profitable?
- Do key employees have transferable employment contracts?
- Are there any employees that are key to operations, and would it hinder daily operations if they left?
- Are the products or services offered by the company distinct and competitive?
- Does packaging meet federal and local guidelines? Is the design dated or can it be used in the future?
- Are processes proprietary?
- Does the company have long-term customers, or are customers constantly churned?
- Does the company have many customers or depend on a few large clients?
- Is the company consistently bringing on new customers?
- Do assets have clear ownership?
- Are there any pending lawsuits or law violations?
- Are leases long-term and transferable?
- Are there leans or claims?
- Are required licenses and filings up to date?
Ease of Transfer
- Are systems/processes easy to adopt?
- Could your clientele be easily transferred?
- Are you, the business owner, needed for daily operations, or can you take time away from the business without any consequences?
- Are your responsibilities easily transferrable?
- Are you willing to stay involved in the business if a potential buyer prefers?
Make a Pre-Sale Plan
Once you’ve identified company weaknesses, it is vital to identify and rank the importance of improving each before the sale. For instance, if revenue is stagnant or cash flow is poor, those issues should be prioritized over IP matters.
Target the areas of weakness that matter most to the business and might lessen a buyer’s interest. Also, ask yourself if making changes before the sale is possible and if the improvement cost makes it worthwhile.
Once improvement areas are identified, your plan needs to include the following:
- The time required for the improvement.
- The steps necessary for the improvement.
- The resources needed and what you’re willing to commit.
- How you’ll carry out the improvement.
Consider the State of the Economy
The value of your business will fluctuate in concert with the state of the economy. If the economy rapidly expands, sellers have much greater negotiating power with buyers who want to take advantage of growing sales.
The buyer has greater negotiating power if the economy is in recession or if a recession is expected. Also, there will be fewer potential buyers as lending requirements become stricter or buyers focus on their company’s survival during tough times.
If the economy is declining or in recession, ask yourself if you can hold off on a sale until it improves.
There is an exception, though. If the business continues to flourish during tough times and shows itself as an “all-weather” business, it will retain its value.
Utilize Professional Reviews
Having your legal situation reviewed and cleared by an attorney adds tremendous value to the business. The buyer will likely have their own due diligence legal review of the company performed. If their review shows no legal issues exist, buyer trust improves, and the company valuation rises.
An accountant is essential when structuring in preparation for a sale. Having your financial statements in good order and presented as reviewed also increases the business valuation. Like your legal situation, the potential buyer will likely consult with a professional to perform a complete analysis and inform the buyer of the statement’s completeness and presentation. Financial statements are another chance to build trust and impress your buyer.
Keep It Quiet
When considering a sale, your intentions should only be shared with key employees after they sign a confidentiality agreement. You’ll tell your financial and legal advisors about the potential sale and stress the importance of keeping your intentions private.
Word getting out about a potential sale could cause uncertainty among customers, employees, and suppliers, resulting in disruption and a loss of valuation.
Consider Using Pros for the Best Results
Professional M&A advisors are experts at finding crucial areas for improvement, creating an improvement plan, and positioning the company to realize a higher sales price. Having structured companies for sale across industries, they’ll know what buyers are looking for and what will best boost value.
The use of professional advisors will result in the highest sales price.
Are You Ready to Sell?
The goal of a buyer is to negotiate the lowest price possible, and you need to be prepared. If you’re considering a sale and willing to commit to each of the above actions, you’ll walk away happy.
Bringing in M&A advisory professionals gives you the advantage when negotiations start. Your business will be structured to sell by pros that see the company from an external viewpoint, knowing what the buyers want to see.
If you’re considering going to market, schedule a call with Quantive M&A and valuation experts to start the process on the right footing and realize the highest price.