If you’re considering selling your business – and want the best offer – the time to start preparing is now. There is a lot of work that goes into a successful sale, and we can help.
This post will review the steps you should take to prepare your business for a sale, and our next post will review the steps you should take to actually promote and finalize a sale.
Step 1 – Know Your Financials
First, you need to understand the true range of value for your business. The market value of a small-to-mid-size business can actually vary greatly from the book or tax-mitigated value because these businesses are usually managed to minimize taxable income. While this benefits the current owner, the cash flow will look less appealing to a potential buyer, so you should perform a financial recast to calculate the true earnings.
We recommend recasting your business to EBITDA. This recasting process will provide buyers with an income amount more reflective of true earnings. The easiest way to think about the recasting process is to consider this as a way of demonstrating the financial results of the business “as if” it were owned by the buyer (taking into account tax-motivated or other discretionary transactions that reduce corporate earnings). For more on this process, see our blog post.
You will also want to understand your working capital situation. In the simplest terms, working capital can be defined as current assets minus current liabilities, but ultimately it is the amount of operating liquidity or cash available to a business at a given point in time. Working capital is an essential part of the day-to-day operations of a business and is just as important as employees and physical assets. For more on working capital, see our related blog post.
Step 2 – Know Your Strengths
Next, you’ll want to know your strengths. To a buyer, strengths include:
- Strong EBITDA margins
- A good multi-year EBITDA trend
- No customer or vendor concentration. Rather than having a large concentration of customers and vendors in one industry/area, a well-diversified set of customers and vendors means less risk for the next owner. A buyer wouldn’t want “all of his eggs in one basket,” so to speak.
- Just remember, “the lower the risk, the higher the valuation”
Step 3 – Know Your Weaknesses
After thinking through your strengths, think of the opposite. Anticipate which weaknesses a buyer or their advisor would bring up, and make any adjustments to mitigate these areas.
Ultimately you need to contemplate how you tell the story of your business and how you operate your business, which are critical considerations for a potential buyer.
Step 4 – Know Your Target Audience
Should you sell to someone within your family? How about a private equity firm? How do you choose? This, of course, can be stressful, especially if there is pressure to keep the company within your family. While the selling process differs with every company, the types of buyers present usually remain consistent, and there are pros and cons to each option.
To better understand the implications of who you should sell your business to, reference our blog post.
Step 5 – Know the Next Steps
Now that you understand the steps required to prepare your business for a sale, it is time to review the steps for actually going to market and selling your business.
Our next blog post will review the 10 steps to selling your business. We’ll review the due diligence process (it typically worse than you can imagine), the overall process (be prepared for the deal to “die” three times before it finally closes), and which marketing materials will show your business in the best light. Be sure to check back for that post in a couple of weeks!