03 May Get Ready to Sell Your Business: Six Key Steps
Sooner or later, the day may come when you seriously consider selling your business. Selling to a third party means that there are several steps you should take before you begin actively marketing your company. Keep in mind that the more time you allow for preparation, the better your results are likely to be. Let’s take a look at six of the most important steps you’ll want to take in the time leading up to the sale.
Step One – Groom a Successor and Build Your Management Team
If you have the time, grooming your successor and building out your management team is a very prudent move. Prospective buyers usually don’t want to feel as though they have to handle every aspect of running a business when buying. Have key people in place who will be ready to go on day one after closing. This will be a major plus for your buyer.
Step Two – Clean Up Your Financials
When it comes to cleaning up your financials, there are four steps you should take. First, you’ll want to organize your financial statements and have them reviewed by a CPA (or audited if you have a bigger company). It is best to do this for two years before going to market if you have the time.
Second, focus on the presentation of earnings. In particular, you’ll want to focus on what are legitimate adjustments or add-backs. What are issues that buyers may dispute? Examples of what buyers may dispute are having family members on the payroll, running personal expenses through the business and other such issues.
Third, you’ll want to clean up your inventory. Excessive or old inventory should be addressed. Finally, it is important to separate out your real estate and other assets that are not part of your business. Remember, the goal here is to make certain that your financials are organized and easy to understand.
Step Three – Have a Growth Plan
Most prospective buyers will be interested in your business’ potential for future growth. There are three major steps you can take to spell out that potential growth. The first step is to outline what you would do in the future to grow your business. The second step is to include a 5-year projection that, importantly, also includes the capital expenses required. Last, but certainly not least, it is vital that you stay focused on your company’s sales performance while you are actively working to sell the company.
Step Four – Reduce Risks to Earnings from Customers
Next it is important to look at ways to reduce risks to earnings from your customer base. In particular, you’ll want to address the risk of losing key customers if you leave. When possible get assignable contracts in place. In this way, a prospective buyer can proceed with confidence. Also, try to minimize customer concentration risk. If you have customers that represent more than 10% or 15% of your revenue, buyers will perceive that as a risk to future earnings if they lose those customers.
Step Five – Reduce Other Dependencies That Pose a Risk to a Buyer
Buyers don’t want to see potential problems that will increase the risk to future earnings. Reducing these potential risks translates into increasing the likelihood of a sale and achieving a strong valuation. Having key employees and key suppliers firmly in place is a smart step in the right direction and will likely boost the chances of selling your company.
Step Six – Look for and Neutralize Potential Deal-Killers
Having a deal fall apart is painful but it can be avoided. Some of the most common deal-killers are real estate and other lease issues, equipment that is in need of repair or replacement, human resources issues, such as key employee turnover, and any pending litigation. Spotting these potential deal-killers and then finding ways to neutralize them is another key step in boosting the chances of successfully selling your business.
By following these six steps, you will dramatically increase the chances of selling your business. Like most serious endeavors in life, preparation plays a central role in successfully selling a business.
