Once you have decided to sell your business for a detailed discussion of the reasons owners might want to sell their companies), it’s time for the real work to begin. There are many things you should be doing in the months (and even years) leading up to the sale.
In theory, it’s not that different from the steps you would take before putting your home up for sale. You probably wouldn’t stick a “For Sale” sign in your front yard before doing some maintenance, repairs and general housekeeping spruce-up so the home is more attractive to buyers — and you can list it for sale at a higher price.
Similarly, there are a number of “housekeeping” items that should be on your to-do list before putting your business up for sale. By addressing these things early, you will make your company more attractive to potential buyers, while also boosting its value and potential sale price.
In the Eye of the Beholder
The first thing you need to realize is that most potential buyers will be looking at your company through a different lens than you are. You are probably too close to your business to view its value objectively — it’s your “baby” and you’ve poured years of blood, sweat and tears into building it.
But buyers have no emotional connection to your business. The value of your company to them is based strictly on quantifiable measurements that will help them determine their potential return on investment in your company. Specifically, they want to know:
- How much cash flow and earnings will your business generate in the future?
- When will cash flow and earnings be generated, and what is the risk that projections will fall short?
To project the amount and certainty of future cash flow and earnings, buyers will look at three main components of your business:
1. Your customer base - Do you primarily sell to other businesses (B2B) or to consumers (B2C)? Are most of your customers well-established or relatively new? Have you experienced high customer turnover? Are long-term (and legally binding) customer contracts in place?
2. Your product and/or service mix - Are your products/services mature or new? High-tech or low-tech? Are they on the upside or downside of customer demand? Do they fulfill your customers’ basic needs, or their wants?
3. Your sales channels and territories - Are sales made via a commissioned or non-commissioned sales force? What is the role of the Internet in selling your products/services? Is your sales territory local, regional, national or international?
Boosting ROI and Minimizing Uncertainty
To maximize future cash flow and earnings, focus your efforts on business opportunities that offer the highest possible ROI. And to minimize uncertainty, diversify your business operations as much as possible. This includes diversifying all three of the components listed above — for example, broadening the base of customers you sell to, introducing new products and services to your existing and new customers, and identifying new sales channels and territories that can help boost your sales at the lowest possible cost.
Of course, the less risk buyers see in purchasing your company, the better. While there is a certain amount of risk involved in the purchase of any business, you can make your company more attractive to buyers — and worth more money to them — by reducing their risk as much as possible. In particular, focus on diversification (as detailed above), reducing debt and making your company as desirable as possible to potential suitors.
Driving Business Value
Also focus on a handful of specific value drivers that can drive up your company’s asking price. These typically include the following:
- Your finances: In particular, buyers want to see a history of consistent sales and revenue, healthy profits and strong cash flow. Choose a few financial key performance indicators (KPIs) to keep a close eye on, and strive for improvement in each of them in the months leading up to the sale.
- Your management team: Your key managers and executives will be the ones primarily responsible for making sure the transition to new ownership goes well — and keeping everything running smoothly after you’re gone. Financial incentives may be necessary to make sure they stick around.
- Your growth prospects: Most buyers aren’t interested in maintaining the status quo — they want companies they can grow. Be sure to clearly explain in detail, specific growth opportunities for the business.
- Your employees: Are your people really your greatest asset? Demonstrate this to potential buyers by giving your employees everything they need to do their jobs well, whether this is adequate training or the right equipment and technology.