- Determine the value of your company.
- Clean up your financials.
- Prepare your selling strategy in advance.
- Boost your sales.
- Pre-qualify your buyers.
- Get business contracts in order.
- Find a sell-side expert.
Sell your business safely and smartly with these expert tips.
When a business goes on the block, it is not just buyers who are investigating. Smart sellers are coming to the table with a clear understanding of their business’ competitive position in the market, a realistic asking price and knowledge of a potential buyer’s suitability well before they sit down to negotiate.
Selling requires careful planning — everything from cleaning up sloppy books and tax records to dressing up a tired old operating system — even ramping up marketing to juice sales and command a higher asking price.
In the coming decade, many independent businesses will change hands as baby boomers continue to retire in droves.
If you are considering selling your Canadian based business, consider these seven steps to stay on the offensive.
- Determine the value of your company.
A third-party valuation can supply a realistic estimate of what your business is worth. For a set fee, often ranging from $5,000 to $20,000, a qualified valuation professional can review a business and its competitive environment. The review typically considers everything from sales to receivables, inventories, and other assets, as well as outstanding debt or liens, all with the goal of finding business threats and opportunities that define value.
Private businesses are typically worth 3 to 6 times their annual cash flow, depending on their overall financial health, industry trends, market demand, location, and other variables. The analysis itself relates to how risky the business is and how much growth it has in front of it.
2. Clean up your financials.
In today’s market, prospective buyers want as much transparency as possible. They are performing more careful due diligence, kicking the tires on everything from a business’ financials to its real estate and equipment. They are contemplating longer.
An owner can avoid red flags by working with an accountant to present clean financial statements and business tax returns dating back at least 3–7 years and ensuring that all assets, liabilities, income, and expenses are accounted for.
Among the no-no’s are keeping personal assets on business books. And do not be surprised if would-be buyers ask for year-to-date results while in the selling process should the accountant prepared statements become 3 + months older.
On the seller’s side, commercial property owners are getting into the due diligence game in the current economy, taking on the role of bankers by vetting the creditworthiness of interested buyers before they’ll consider transferring a lease.
3. Prepare your plan to leave well in advance.
All too often, unexpected factors — an aging or ill owner, lack of interest in succession from adult children, a competitive threat such as the arrival of a better capitalized competitor — forces business owners to sell. So, if you plan to outlast your competitors, prepare your plan to leave now, before such a situation forces a sale.
One exit is having a trusted employee take over the business. she is on the inside, knows all the customers, knows all the skeletons in the closet. If you do sell to an industry outsider, there needs to be enough transition time so the new owner will feel comfortable with the industry.
4. Boost your sales.
Buyers want to see businesses with some upside, when sales are declining, that’s not a good time to sell, buyers might also get skittish if a single customer represents more than 10+ percent of revenue, putting sales at risk if that business is lost. If necessary, diversify the customer base or jumpstart sales with increased marketing and promotions.
While you are at it, push out bloated inventories and get operating systems up to date and say goodbye to nonperforming staff. Overall, what do you have to do to get your sales to increase?
5. Pre-qualify your buyers.
Always pre-qualify your buyers and don’t get overexcited by an offer. In most deals, banks will also want you as the seller to provide a portion of financing for the transaction; this ensures that you have a vested interest in the venture’s ongoing success under new ownership and the new owner will fit into the company's current culture.
6. Get business contracts in order.
There are a host of legal considerations when selling a business. Among those necessary to close the deal is the asset purchase agreement, the legal contract for the sale and the purchase of the business assets, including physical as well as intellectual property. This comprehensive document will consist of exhibits such as noncompete agreements, asset listings, employee agreements and guidelines for the use of website domain names. It does not account for the sale of any stock. The hardest part is collecting the information for a basic asset purchase agreement.
Often deals will stipulate that the prior owner remain in an advisory role for a set period to ensure a smooth transition. You might agree to consult with the new owner for a year. You must have a term of overlap where you are helping that business, but you want to make that term as short as possible.
7. Find a sell-side advisor.
You might be a terrific widget maker and widget salesperson but a lousy salesperson when it comes to selling your own business. That is one of many reasons to consider outside help with a sale. For smaller companies less than $500 Thousand of EBITDA this usually means enlisting a business broker. In this case, the broker is listing the business with suitable marketplaces,
If your business is in the $500 Thousand to $3 Million EBITA range. These are companies that are too sophisticated for a business broker yet too small for an investment banking process. Firms like ours can address your needs.
Sell-side advisors apply a background in deal-making to get the best price. Advisors can also steer buyers to financing resources. The hardest part of the business deal is going through the due diligence. That is typically where deals fall apart, and the sell-side advisor can supply the most value.
Karl Sigerist is a Managing Director at The Shaughnessy Group — The Shaughnessy Group is a lower middle-market corporate finance advisory firm. With our collective experience, access to industry data and resources we can confidentially examine a company to provide a realistic value range. Request your free report.