You’ve worked long and hard to grow your business but now you’re ready to move on to new opportunities. Here are five ways to maximize your return before selling a business.
This can range from identifying what makes your business unique to understanding key business risk to working with the right team of advisors.
You’ll want to sort out these issues before you go to sell.
Be honest about what you’ve built, where its weaknesses are and how you can turn those into strengths.
A little bit of time spent before you put your business on the market can pay off by maximizing how much you get when you sell.
Identify what makes your business unique
One of the main drivers of your business value is identifying the unique aspects of your business that potential buyers won’t be able to find elsewhere.
Does your business offer highly selected products or services that can’t be beat by your competitors? Do you have a solid hold on you market that competitors are unlikely to move you from? Do you have any specific intellectual property or use technology that silos you off from competition?
Find out what makes your business unique and make sure to market those aspects when you are communicating with potential buyers. You want to show them what value they are getting.
Understanding key business risk
Along with presenting the relative value of your business, you also need to be prepared to discuss risks and how specifically your business is insulated from key business risks.
Let’s discuss some common examples:
- Owner dependency: Does your entire business revolve around you and your effort? Are you the main contact for sales, finance, and operations? If so, your business is entirely dependent on you.
This will look less attractive to potential buyers who are leery of what will happen once you are out of the picture.
Instead consider getting a few people to hold management-level positions who can take over these responsibilities. You can move away from day-to-day operations and focus on bigger picture items.
A management-led business is much easier to transition to new ownership and therefore can command a larger price.
- Supplier concentration: Does your business essentially operate with only one supplier? If so, consider establishing relationships with alternatives so you aren’t dependent on one single entity.
This will reduce the risk of any disruptions or changes that occur at your main supplier and therefore reduce a key business risk.
- Customer concentration: Having one best customer who brings in a huge share of revenue may be ideal for you, but that is a risk for potential buyers if they choose to look elsewhere when you’re gone.
Having one customer account for more than 15-20% of revenue increases your customer concentration risk.
Look at diversifying your customer base so your business is not so heavily dependent on the business generated by one customer.
Make your weaknesses an asset
If you want to get the maximum value for your business, you should honestly examine it for any potential weaknesses and remedy those before you sell.
You’re probably going to want to make a few changes before you decide to sell. This might take a bit of effort and delay when you start shopping it around, but it will pay dividends later when you’re negotiating the purchase price.
If you have above average labor costs, consider ways to reduce this by adopting new technology to boost productivity and cut costs.
This will increase your EBITDA (earnings before interest, taxes, depreciation, and amortization) and ultimately increase your sale price.
Get ready for the due diligence process
Make sure that all your finances are in order so you’re ready for the due diligence process. That means at least three years’ worth of taxes, profit and loss statements, balance sheets, etc.
Buyers will want to know about any potential legal exposures and real estate details as well.
A thorough due diligence process has also expanded to include cyber security, e-commerce, and a review of intellectual property.
You should also consider hiring an independent accounting firm to review your operations through a Quality of Earnings (QOE) analysis. This might cost a bit of money and time upfront but will likely yield you a higher purchase price.
Prepare your team of advisors
You are undoubtedly an expert on your own business, but you likely haven’t sold many before so consider working with a team of advisors who do have experience to maximize your sale price.
This might include working with accounting firms, investment bankers, lawyers, or business valuators.
You should also consider working with a broker, who will take a percentage of the price in exchange for helping you through the sale.
Conclusion
Spending some time ahead of putting your business up for sale can yield real dividends by maximizing the final purchase price.
You should identify what makes your business unique and market that to potential sellers.
Identify key business risks in your operation and take steps to limit exposure or be prepared to discuss why you think they aren’t as bad as they appear.
Examine your business carefully for any potential weaknesses and takes steps to turn them into strengths.
Prepare for the due diligence process by collecting the required financial documents and possibly working with an accounting firm to generate a quality of earnings analysis.
Finally, work with a team of trusted advisors who can help you with the aspects of selling a business that you are likely unfamiliar with.
Take some time to maximize the value that you get out of selling your business. You’ve worked long and hard to make it a profitable business so make sure you get what you want out of the sale before you move onto your next venture.