Are You Prepared to Sell Your Business?
For many founders, selling his or her business is far more complicated than just putting a “For Sale” sign in the window. It can take months or years to properly prepare, and unfortunately, many small business owners miss the opportunity to generate a more favorable sale simply because they didn't know all the steps they should have taken prior to entering a full process.
So, before getting too far down the sales process, it's best to spend time preparing yourself and the business for some of the more commonly overlooked aspects of a transaction.
Understand The Financials Of Your Business:
Organize and verify the previous 3 to 5 years of financial statements related to the business. Keeping strong and clear financial information and records is important because interested buyers are going to require a deep understanding of cash flows and your business's profitability characteristics.
Key considerations: What is the story you are conveying with your financials? Do you have monthly subscription revenue or long-term contracts? Do you have a track record of sustained growth or are you experiencing sales stagnation? Do you have too much customer concentration, or are you successfully selling into a variety of similarly sized clients or industries? Do you need a Quality of Earnings analysis completed to validate your financials?
Educate Yourself On The Value Of Your Business:
Determining the market value of your business is a critical step in preparing for a future sale. It's essential to have a clear understanding of how your business is perceived in the market, as this directly impacts all aspects of the sale. To effectively assess your business's value, consider the following:
Historical Financial Performance: Review your business's financial records over the past few years. Are there consistent growth trends in terms of revenue and profitability?
Profitability: What are your current profit margins compared to industry standards? Are there areas where you can improve efficiency or reduce costs to enhance profitability?
Cash Flow: Analyze your cash flow patterns. Are there any fluctuations that might concern potential buyers? How predictable is your cash flow?
Assets and Liabilities: Take stock of your business's assets and liabilities. Do you have any unused or underutilized assets that could impact your valuation?
Industry Comparisons: Research how businesses in your industry are valued. Are there common valuation multiples or metrics that investors use to assess companies like yours?
Competitive Landscape: How does your business compare to competitors in terms of market share, customer base, and innovation? This can impact how potential buyers perceive your business's value.
Future Growth Potential:
Market Trends: What are the current and projected trends in your industry? How well-positioned is your business to capitalize on these trends? Buyers are often interested in future growth potential.
Diversification: Do you have a diverse customer base or rely heavily on a few key clients? A diversified customer portfolio can be more attractive to buyers.
Innovation and Adaptability: How innovative is your business? Are you adapting to new technologies and market shifts? Buyers may see higher value in a business that is adaptable to change.
Standard Operating Procedures: Documented processes and standard operating procedures ("SOPs") can demonstrate that your business is well-organized and can operate smoothly even after a change in ownership.
Key Personnel: Are there key employees who are integral to your business's success? Consider how their potential departure might affect the business's value.
Real Estate Ownership:
Real Estate Assets: If your business owns land, a building, or a manufacturing facility, how does this impact your valuation? Is the real estate directly tied to the business's operations, or could it be separated in the sale? Is there an opportunity to lease back to the eventual buyer?
Location Value: Consider the location of your business. Is it in a desirable or strategically important area of the country or world? Is there potential for redevelopment or expansion that could increase its value?
Financial and Business Professionals: Engage with a financial advisor, Investment Banker, Business Broker, or professional valuation expert. Their expertise can provide you with a more comprehensive understanding of your business's value.
Multiple Opinions: Seek multiple opinions on your business's value to ensure a well-rounded assessment. This can help you identify any discrepancies or areas that require further analysis.
Key considerations: Read Exitwise's 4 Ways To Calculate The Value Your Business for a deeper understanding of this process, or check out our free Business Valuation Calculator to get a comprehensive evaluation of what your company is worth in today's market.
Define Your Exit Plan:
It's important to have an exit plan prior to any sales discussions. Buyers will want to understand your interest and ability to stay with the business, and your reasons for wanting to sell.
Key considerations: How long are you willing to stay with the business post-transaction? Do you have a strong management team able to support the business after your departure? Are you planning to roll equity into the acquiring entity?
How Are You Going To Feel About Walking Away:
Cashing Out podcast guest, Ryan Vaughn, has spent the second half of his career working with high-performing business owners and entrepreneurs to help them build incredible companies and prepare themselves for a future exit. In a recent article, Ryan highlighted the challenges that many business owners face after selling their business, "For a founder, an exit is the culmination of the journey. The final success in a string of them; the proverbial pot of gold at the end of the rainbow. We chase the exit unquestioningly, so focused on attaining our goals that we never stop to consider what might come after."
After so many years of building a business, many owners are surprised by the emotions associated with walking away - preparing yourself for the "day after" the sale is something that can't be overlooked.
Key considerations: How are you going to spend your time? What is going to bring you daily fulfillment once you're no longer associated with your business? What will bring you purpose in the next phase of your life?
Find Professional Support and M&A Expertise:
Beyond identifying valued teammates within your organization, begin to build out your team of M&A experts, attorneys, and tax advisor. Reach out to professionals that are highly specialized, have a long track record of success, and a demonstrated history of creating competition in a sales cycle. Do your homework, and don't be afraid to ask for referrals and compare notes with other founders and CEOs in your network that have been through a sales transaction before.
Key considerations: Read Exitwise's Who Should You Hire to Help Sell Your Company to better understand your options around who to lean on for support throughout the sales process.
M&A Explained: Frequently Asked Questions
What Is A Succession Plan and Do I Need One As A Business Owner?
A business succession plan is a framework that enables business owners to properly transition management responsibilities before, during, and after a sales transaction. Succession plans are often overlooked but are important to a sales transaction because they increase buyer confidence in the seller's ongoing leadership team. Creating and implementing a proper succession plan can be a time-consuming process but can often be the difference between a successful sale and a disappointing failure.
What Is A Quality of Earnings Analysis, and Do I Need One To Sell My Company?
A Quality of Earnings (Q of E) analysis is an assessment of a company's financial health and performance, specifically focused on the accuracy and sustainability of its reported earnings. This analysis involves scrutinizing various financial components, including revenue, expenses, balance sheets, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to ensure they are correctly represented. It's not an audit, but a comprehensive review that aims to identify any discrepancies, irregularities, or areas of concern.
The necessity of a Quality of Earnings analysis before engaging in a merger or acquisition process varies based on the nature, size and complexity of the business. While it might not be a legal requirement, it is a highly recommended practice, especially for businesses seeking a successful M&A deal. Here's why:
Enhanced Credibility: A quality of earnings analysis ensures that your financial records are accurate, transparent, and compliant with accounting rules. This, in turn, establishes credibility with potential buyers.
Negotiation Advantage: With a clear understanding of your company's financial strengths and weaknesses, you can confidently negotiate the purchase price and terms from a place of strength.
Early Issue Identification: If any financial irregularities or concerns are spotted during Q of E, you have the chance to rectify them before they become deal-breakers.
Efficient Due Diligence: A Quality of Earnings analysis streamlines the process of selling your company. When you can present a thorough and credible financial overview, it instills buyer confidence, expediting the due diligence phase.
What Should I Do If I Don't Have A Network of M&A Experts, Lawyers, or Investment Bankers To Help Me Sell My Business?
Industry-specific investment bankers and transaction experts help founders develop a stronger understanding of their market potential, and confidently define the opportunities available during a sales process. The Exitwise platform was created to help founders identify the right team of investment bankers, M&A advisors and experts to drive maximum value during a sale. But more importantly, they will stay with you to help you through the exit process every step of the way.
Set up a time to chat with us and we’ll gladly walk you through the process.