Many business owners find it hard to even consider selling their business. He or she has risked, worked, and sacrificed so the business can succeed. It’s hard to imagine letting it go.
Still, many understand that proper planning includes knowing when to sell. Some owners plan to walk away at retirement, satisfied with the income it generated through the years. Others consider the value of their business to be an integral part of their financial plan and wish to sell it at retirement. Much like selling a home, a business owner needs to spend time preparing the business for a sale.
It’s important to know what lies before you if you believe you’ll be selling at some point. The process isn’t as easy as putting up a sign and waiting for the phone to ring. Preparing your business to maximize its value and making it appealing to buyers can take 3-4 years.
This Week’s MoneyDo is to consider the steps you’ll need to take and questions you’ll need to ask in order to sell your business – even if you don’t think the sale will take place for a while. Here are several steps to consider:
- Who are you going to sell it to? Seems like a simple question, but it’s a critical thought to consider. Do you wish to sell your business to a key employee, or a group of several employees? How about family? If you decide to sell to employees or family members, perhaps the optimal strategy is to sell smaller interests over time to avoid saddling the new buyers with debt.
- Clean up your business financials: Several years prior to selling, have your year-end financials either reviewed or audited depending on the size of your business.
- “Reviewed” simply means a CPA conducts analytical procedures and makes inquiries to ascertain whether the information contained within the financial statements is correct. The auditor then provides limited assurance there are no material modifications needed to conform to GAAP (Generally Accepted Accounting Principles).
- An “audit” takes the process a step further and a CPA will test and prove processes are being conducted effectively. The auditor must corroborate the ending balances in the client’s accounts and disclosures, which calls for the examination of source documents, third party confirmations, physical inspections, tests of internal controls, and other procedures as needed.
Either course will give a potential buyer more comfort compared to internally-prepared financials.
Since you’re doing some financial housecleaning, make sure the business is efficient and operating costs are in check, accounts payable are in good shape and retail space is clean and presentable. It may be tempting to drastically cut expenses to improve profitability, but cuts must be sustainable. For example, your business will not be attractive if technology or your office is out of date.
- Focus on revenue: As the saying goes, revenue is where “the rubber meets the road.” Businesses are typically valued as either a multiple of gross revenue or net income. Either way, increased revenue equals a more valuable company. Consistent revenue growth will look very attractive to buyers evaluating trends.
- Prepare the business to run without you: You should be prepared to step aside more often. A potential buyer may see a much easier transition if you’re no longer the face of the company at the time of the sale. Having a management team in place who will continue to run the company after the sale also provides value and could expand the pool of potential buyers.
- Determine a value: Once your year-end financials are in place, it might be advisable to consult with a business valuation expert. For a fee of roughly $3,000 – $7,000, a third-party valuation can provide a realistic estimate of the value of your company.
- Transition assets you wish to keep out of the business: An overlooked concept is considering what property held by your business you wish to keep, like cars or equipment. Transitioning that property out of the business will make for a cleaner sale in the future.
If the process of selling a business seems overwhelming, find a financial advisor you can trust to help walk you through the steps you’ll need to take. Preparing before the change occurs might give you more peace of mind when the time comes.