By: Brandon Layo, CPA, CVA Selling your small business for maximum value was already a difficult journey to undertake – now made exponentially more difficult in the wake of a global pandemic. With uncertainty, fear, and capital limitations imposed on potential buyers of your business, you must be able to adapt to exit successfully. There is no sugarcoating it – many businesses will go out of business rather than selling. Working with an outside professional on building business value can help not only grow current profitability/value of a company, but also bring to light red flags before you attempt to sell. In many cases certain steps take months and even years to implement, causing the planning stage to be crucial in the ultimate sale of your company. Here are four important steps (there are many, many others) to sell your business at a high value:
One – Put the company in a position to run operations without you. If your business cannot run without you deeply involved, why would a buyer want to buy your business? Value walks right out the door along with you. There must be a set of processes in place to transition customer ownership to your staff. Are they competent and trained enough to handle this? Are you willing to let go of important tasks and trust them enough to do a good job? A good litmus test for how well your company operates without you is to think of how you prepare for a personal vacation. If this is a relatively straightforward process where business does not slow down, then you are on the right track. If you cannot take a vacation (or you work while on vacation extensively), then this needs to radically improve before selling.
Two – Create company favorable payment terms in your billing process. A potential buyer is very concerned with the cash flow of your company - and they should be. To buy your business they have to make an initial or installment investment, and they do this to realize an eventual return on their investment. Let’s compare two hypothetical companies with only one exception – Company A has Net 30 payment terms and Company B has Net 90. If customers pay on time, Company B’s cash flow is two months behind Company A. Two months of sales can either sit on the balance sheet as accounts receivable or as cash – which company would you rather buy?
Three – Be honest with yourself about the business. It is almost universal that business owners feel their business is worth more than it truly is to potential buyers. Not surprisingly, many business owners are disappointed when reality sets in. What other areas might you be kidding yourself or overly optimistic about? Where do you cut corners? How do you really treat your staff? How reliable and loyal are your customers? You must remove personal bias when it comes to these and similar questions to properly assess your situation. Some business owners have this ability, but often an outside perspective can be an immense help. If you have feelings of discomfort going over the tough questions, it is almost certain potential buyers will feel the same – and that feeling costs your business selling value.
Four – Your financial statements should be impeccably clean and shiny. The #1 thing a potential buyer will do is look at your financial statements. A sophisticated buyer will look back several years. Often this is done even before you can pitch your company as the next Fortune 500 company. Your financial statements are your first impression to a buyer, and you only have one chance to make a first impression. If this information is incomplete/missing/disorganized, your business will sell for less than optimal (or will not sell at all). If your financial statements are prepared by an outside CPA, that adds a level of trust to potential buyers. Also, remember that clean and updated financial statements add several positive benefits to the current management of your company.
Business owners have an incredible amount of responsibility, and only a limited amount of possible focus. Not surprisingly, certain responsibilities are procrastinated to make way for urgent company demands. It is easy to fall into a cycle of reacting rather than strategic planning. If you are looking to sell your business in the future for a high value, do not wait to address these four important steps.