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Financial Consulting

Six Crucial Factors to Sell Your Business

By Maurie Cashman

There are crucial parts of your business that should be addressed before you try to sell. Last week we discussed the fact that your business value may be increasing for a variety of reasons. To capture that value you need to follow a process your business to attract and hold a buyer’s attention. Here are six crucial factors you should address:

1. Get a Qualified Valuation

The number one reason that businesses for sale fail to close is that owners have unrealistic expectations of what their business is worth. The first step you should take is to have a qualified business valuation expert take you through the process of valuing your business. A good valuation will set a stake in the ground for where you are at when you start the process. If that value is too low, a good valuation will point out factors that you can strengthen to increase the value. This may mean finding ways to increase sales, reduce cost, making more effective use of working capital, or diversifying customer or supplier bases.

A good valuation should show you all of the assumptions that are the basis for the valuation. A good expert will not back down just because you disagree with their conclusion – they should force you to tell them what assumption in their valuation is incorrect. Valuation is not an exact science and you should look for someone who not only has the credentials necessary, but also has a strong financial management background so that you can feel that they can get a grasp of your business.

A good valuation will give you confidence when entering negotiations with a potential buyer. Buyers will always test your price. If you can defend it with sound logic, you are more likely to get the price and terms you are looking for.

2. Get Your Trends in Order

Nothing is tougher to sell than a business that is in decline. Buyers want to feel that they are buying something that is poised to grow and they want to feel that they have a margin for error. If sales are declining, you should be prepared with a solid explanation for why and a written plan for what you plan to do about it. That is just for starters. You may want to consider holding the business off the market if you can until you have sales trending back in a favorable direction.

3. Clean Things Up

This has multiple meanings. First, you should go through your operation from top to bottom and ask yourself if you would be interested in buying your business if this were the first time you had seen it. Pick up trash, clean out that rats nest you have been tolerating in the back room. How about some fresh paint? Are your offices a disaster with stacks of paper everywhere and overcrowded employees? Does your business look like it did 30 years ago? If it does, expect a buyer to see that immediately, and to react negatively.

What about your financial statements? Are they up to date? Can you produce five years of tax returns and management financials at the drop of a hat? If you can’t, any buyer is going to wonder why. Do you understand your financial statements and can you speak intelligently about them and what they mean to your business?

Are your accounts receivables current or have you been carrying your customers for 60, 90 days or more? Get these current so that a buyer doesn’t have to question whether your customers are creditworthy of whether you know how to run your business. Your inventory is similar. If your inventory value is more than 30% of your sales (less than that in many industries) you likely have unsaleable and obsolete inventory on your hands. A buyer will not buy this and even if they will, they will severely discount the value. Just because you have $2 million of inventory does not mean that you can get that value for it in a sale. You are better off to identify this pre-sale and sell it for what you can get while you can control the terms of the sale.

4. Examine Key Risks

There are risks in every industry and every business. You need to identify these risks and you should be able to speak confidently about what you are doing to manage them. Do you have a customer who is responsible for more than 10% of your sales? Then you have a customer concentration risk that you should either resolve or take measures to manage. The same may go for concentrations among your suppliers. Are your inputs or outputs commodity products? Then you may have price risk that is not entirely under your control. Are your costs largely fixed? If so, how would you manage a drop in sales or gross margin? Do you have legal or environmental risks? What have you done to mitigate these?

5. Get Your Staff in Control

Many buyers are looking for a business that can run itself. They may be looking to acquire because it is a strategic fit for an existing business or it may be diversifying them into a new, but related, industry. In any case, buyers are looking for talent. They know that a transaction is going to be hard enough as it is. It is doubly hard if there is not key management in place to keep operations running smoothly, keep customers buying from the company and keep employees showing up for work. Identify your key employees and make sure you have taken measures to make them want to stay.

6. Don’t Wait Too Long

Finally, don’t wait until you are too old, sick and/or burnt out to operate your business to decide it is time to sell. Even the most empathetic buyer will recognize your plight and will use it to drive the value of your business into the ground. The best time to sell something is when you don’t have to sell it.

By addressing these six crucial items, you will have a much better chance of a successful outcome when it comes time to sell your business.