Unless you have figured out how to live forever, or are fortunate enough to be able to pass on your business to someone in your family, at some point you need to prepare your business for sale. You’ve put all that hard work into your business, you deserve to get something out of it.
If you are considering passing on the business to someone in your family, it is worth noting there are statistics showing that only 12% of family businesses make it to the third generation. It might be better for everyone if you sell out and finance an alternative career for your family members. This reference article is from 2008 but is likely still accurate today.
There are many reasons why someone may want to buy your business but ultimately most are because you are doing things successfully. A prospective purchaser may simply want to earn a return on their investment, they may be wanting to get rid of an irritating competitor, gain economy of scale, or show growth on their financial statements. Looking to grow an organization is especially true for larger, public companies who are able to scale their systems and management to take on more business. It is important to realize the motivations of a likely or actual prospective buyer as it greatly affects how you prepare your business for sale.
1. Will you sell your business as a going concern?
A prospective purchaser might only want your equipment, a few of your employees, and the most profitable of your customers. They may not want your business as a going concern.
If the purchaser doesn’t want to buy a going concern, it may not care about senior management, the accountant, or salespeople. They will be most interested in high quality staff who know the business and have links to customers or suppliers that will advance their business. Getting rid of duplicate staff and overhead, and, let’s face it, you might be overhead at this point in your career, can significantly improve the profitability of their new business unit.
Possible motivations of buyers will be the subject of a future blog but, for purposes of this blog, let’s assume we are talking about selling your business as a going concern.
2. Improve your brand
Whether you realize it or not, even if you have not gone through a formal brand development process, you will have some or all the elements of a brand in your company. You live and die by your reputation. That is essentially your brand. I know I am simplifying this, but you want your business to stand for something that people will notice. You need to really sit down and think about this. Are you known for your customer service? Your large and diverse equipment fleet? Perhaps a very specialized market niche? Then draw up some plans to emphasize things that will improve your reputation. The thing you should be doing might not be something you are already known for.
3. Hire excellent people
Anyone purchasing an existing business is going to be very interested in the key people in your organization and their motivations for working for you. Remember, even if it’s after a few months or a year or two, you are likely to be gone once the sale is complete. Who is going to make the business tick for the new owners? They will often bring in a new manager, but initially the success of the new business unit is going to happen because of the staff who are already in place.
You need to make sure you hire excellent people. If you have skeletons in your closet, perhaps because you hired your nephew who couldn’t manage his way out of a paper bag, get rid of them! You need to be selling a professionally run organization. You probably have a bit of time. Review your key staff and develop a strategy for upgrading them, if necessary. Even if you don’t sell, you will be much better off!
4. Make yourself invisible
No, you shouldn’t be trying to be the next new superhero. Jim Collins in his book, “Good to Great” tells the story of an investment guru and manager who micromanaged 250 businesses. It may sound impossible but he did it through sheer hard work and was quite successful at it. The problem was that this model wasn’t sustainable. When the man tried to exit his role, almost all of the businesses struggled and it was never the same.
You don’t want to be that guy. If you feel the need to work 80 hours a week on the business, put those hours towards figuring out how to make your organization stronger and self-sustainable. Get a new cell phone number, if that is what it takes. You want your customers to be phoning other people in your business, not you. This won’t happen right away but get started on it. If the purchaser believes the success of the business totally depends on you, he knows he won’t be buying a going concern and the price will be much less.
5. Find yourself an expert who can help sell the business
If you are like me, you probably don’t care for the real estate sales model where you pay 5% or so in real estate commissions to dispose of your house or shop. I keep seeing the dollars and thinking, there goes a nice holiday or new boat. But, really, the point of using a real estate agent is that they should be able to find buyers who will pay much more for your property so, even after paying their commission, you net more than if you tried to manage the sale by yourself.
That is the reason why you want to find yourself a merger and acquisitions expert or perhaps a capable banker with expertise in this space. If you wait until United or someone else contacts you, it can be hard to know whether their offer is fair or is the maximum you could get. The M & A expert can help you prepare for this and then market your business when it is time to sell. There are many pitfalls in selling a business and you only get to do this once. No do-overs!
Finding an expert allows you to concentrate on running your business and the expert to focus on selling it.
6. Find yourself a good tax accountant (If you don’t already have one)
A good financial accountant will help you prepare your financial statements and manager cash flow but a good tax accountant does much more than just file your tax returns. He or she will help minimize the tax effect of the sale of your business. You really don’t want to give any more money to the IRS than you can help. As with the M & A expert, you need to be prepared ahead of time so that when an unexpected offer comes your way, you have the information you need to negotiate the deal that makes the most sense for you.
7. Don’t be running your business on QuickBooks and spreadsheets
Any potential purchaser will be continually evaluating the professionalism of your business. Running your business on QuickBooks and spreadsheets will be at best a neutral factor. And only for smaller organizations. If the purchaser is going to convert your business over to their systems, this may not seem such a factor but your information may be viewed as unreliable. This will complicate the sales process and delay the closing period as more due diligence may have to be done.
Perhaps a new business software system should be in your future. I am not just suggesting this because we sell accounting and rental software. As a CPA I know the importance of good systems. Think about it.
8. Find yourselves an external accountant or auditor
Purchasers will want assurance the numbers are accurate. Find yourselves a reputable accountant or auditor who the purchaser will have heard of and get them to report on your financial statements. Hiring your uncle Bob is not going to work unless he is a partner at KPMG or one of the other larger firms. A regional CPA firm will do.
9. Review your fleet – the auctioneer might be your friend
Chances are this was on your list. You want a list of quality equipment that matches the requirements of your customers and is positioned for growth. Your equipment needs to be well-serviced with a high utilization rate.
10. Review your customers
This is your last chance to dump those unprofitable customers. The purchaser will want to know who your key customers are, average sales, etc. Also consider how you can add new customers to your rental business.
11. Consider the impact of how a sale will affect your staff
It’s hard to do but you need to keep your mouth shut around your staff when you are considering how to sell your business. One of the most important factors in any employee’s life is employment. That is why they are called employees, after all! They want stability and certainty and you don’t want them out looking for jobs because you are talking about selling out. For key staff who need to be involved in the discussion, you need to explore what their motivations are. Are they likely to stick around, bringing more value in the sale, or do you need to commit to retention bonuses?
12. Boost your cash flow
Don’t go crazy and lay off a bunch of employees for short-term gain. This may improve your immediate cash flow but purchasers will look for consistency and growth in your financial statements. Any short-term boosts or irregular items will be removed from the valuation process.
Do what any wise business owner would do and figure out how to constructively cut costs on an ongoing basis. Do what you can to boost sales but not by cutting margins, remember your metrics must be positive and consistent. Run your business as if it really is a going concern. If you have a short-term equipment purchase scheduled and you have a short-term opportunity to sell your business, it would make sense to defer the purchase. You won’t get any brownie points for new hires or equipment purchases as they may not fit the direction of the purchaser. At the very least, the value will be discounted.
Most business valuations are based on a multiple of consistent, standardized cash flow. Purchasers generally like to see the last three years of your financial results so trying to improve cash flow today won’t help much, at least, initially. Three years later, if the positive results are sustainable, you will be much better off.
A future blog will further discuss how businesses are valued and what you can do to improve your numbers.
13. Invest in marketing and specially digital marketing
Just a minute, didn’t I say you should be looking for ways to reduce costs? Yes, but new purchasers are more interested in how to grow sales. They likely already know how to cut costs and operate efficiently. They are attracted to new sales like a moth to a candle and it takes marketing to generate sales growth.
In our business, the sale and support of mid-market accounting/ERP and rental systems, the stats show that businesses investing in digital marketing are growing 21% faster than those who don’t. It is that type of growth that will attract the attention of potential purchasers and increase your sale proceeds.
Assuming you are trying to sell out today, you need a two to three year plan to solve this problem. It will pay dividends, both in sales results and your company valuation. New purchasers are very impressed by healthy sales funnels.
We’ll talk more about digital marketing in a future blog.
14. Buy some paint!
By this I mean, look around your business and see how you can improve its professionalism. That could include a paint job but there are many other ways. You want your purchaser to be impressed both by the way you run your business but also by how it looks. Most people remember that first impression.
Don’t go crazy and go out and buy expensive paintings to hang on the walls. But it looks much better if you have LED monitors rather than the old CRT ones. Your staff will thank you as well.
15. Make sure there are no personal items in your business
It is tempting, especially when your spouse may be the bookkeeper, to run personal items through the business. Get rid of them! There is nothing that will turn a purchaser off more quickly. They don’t want to have to sort through your numbers and deal with this issue.
16. Set a plan and be focused
Chances are you have been in business for many years and during that time, you have dealt with many personal and professional issues. Look ahead to see when you think you would ideally like to sell out. Then focus on preparing for that event. Be ruthlessly focused on whatever it takes.
At one time William Randolph Hearst was purchasing 40% of new art that was being released. He had warehouses of the stuff from all over the world. But near the end of his working life, he was bordering on bankruptcy, despite his shiny new castle and all the amazing art. The positive ending to this story was how he buckled down and began selling his accumulated art, resulting in a total turnaround in his financial situation. At the end of his life, he was a wealthy man again.
This can be you. What can you do in the next two to three years to improve your business?
17. Look for opportunities for recurring revenue
You may not have heard of this term before. While it obviously means revenue that happens more than once and on a recurring basis, the importance to the business is that a high percentage of recurring revenue means major portions of your expenses can be covered by this revenue. That sets you up perfectly for high levels of profitability and a much higher business valuation.
Sell service contracts, equipment leases, long-term contractual rentals, or whatever you can come up with. All of these will count and, if you can do this effectively, recurring revenue is probably the factor that contributes the most to a high business valuation. Not necessarily easy to do but well worth it!
Preparing your business for sale is a project just like any other. Find yourself a peer group, internal or external, who can review your business with an objective view. Pick some short-term and long-term goals and get started. Remember that maximizing cash flow and recurring revenue, if you can find it, are the most important business valuation activities.