“Even if you build a business with zero intention of selling it for a big payday, and even if you never do actually sell, you should still build your business as if you are going to sell it someday. Building a business with this mindset will make the entire operation run more efficiently—you’ll be able to see how your business is trending overall, maintain a cleaner financial picture, and implement better standard operating procedures,” writes Gregory Elfrink in this Foundr article.
It’s never too soon to prepare. There are all kinds of reasons to sell a business – retirement, cashing in on ROI, moving on to the Next Big Thing. Whatever your reason, you’ll want to maximize your profit. This requires preparation and forward thinking, and we can help.
Here are some areas to consider to make sure your business is sellable.
Buyers want to know they’ll be getting a business that will allow them to make money. The best way to prove your business fits that ticket is to have great financials. This means
- Records over at least 3 years if possible
- Strong (and, ideally, improving) cash flow, Seller Discretionary Earnings, and gross revenue
- Well organized, professional documentation
Buyers understandably balk at weird numbers. If you have missing information or sloppy bookkeeping, they wonder what might be wrong or hidden. Consistent, professionally prepared P&Ls and taxes tell the most compelling story.
Competitive advantage increases the value of your business. “If your competitors can’t match your differentiation without investing time, money and effort, buyers will pay more to have your edge,” writes Kevin Daum for Inc.
Standing out can be easier within a niche. “To maximize the value of your business, you are better off focusing on one or two areas that your business can do really well. It’s much easier to duplicate your process with others this way, and it also increases the quality of the work you do as you can train and hire specialists as opposed to generalists,” says Shawn Sparks in this ThinkAdviser piece.
Onward and Upward?
Growth potential is another big factor. Do you have ideas to offer a buyer about how he or she might grow the business? Maybe there are untapped markets? Unexplored marketing channels? Tech-paved pathways to scale?
The success of the business can’t be wrapped up in your knowledge, relationships, charisma, etc. A seller may support new ownership for a transition period, but make sure you have clear, accessible documentation on all operating procedures. If you have experienced managers on your team who can take the reins, all the better. A well-trained staff who will stay with the new owner is also helpful.
A (terribly burdensome!) way to vet your business’ ability to function without you is to take a vacation for a while. See where your systems snag in your absence and respond accordingly—rested and tan.
Distribute Your Eggs Over Enough Proverbial Baskets
Diversity in your client base and supply is important. Customer concentration is a red flag to potential buyers. A company with more than 15 percent of its revenue dependent on one client is vulnerable. That client might leave shortly after you sell your business. A buyer will recognize this attrition risk. Follow these tips to minimize concentration trap for the potential buyer and better position your business to sell at a premium value.
Likewise, multiple suppliers for all your products are important. According to Elfrink, this adds value in the following ways:
- Profit Margin Increase: [Foundr has] had ecommerce sellers say flat out that they increased their profit margins by double percentage points simply by finding a different product supplier that gave them a much better deal.
- Avoid Shutdowns: What happens if you only have one factory making your product and that factory suddenly goes out of business? You’re out of luck. You need backups for emergencies like this. Without a good supplier, you are effectively out of business.
- Avoid Suppliers Getting Leverage on You: The supplier knows that without a product, you have nothing to sell, and they may try to increase their price over time, thinking that you will just accept the price hike. Having multiple suppliers will greatly increase your ability to negotiate for better terms.
High-volume, reoccurring revenue indicates stable, ongoing success. Customer renewal saves on acquisition, indicates a satisfying product or service, and provide a bankable model, according to “exit guru” John Warrillow. “If you currently eat what you kill, find a way to make your product or service renewable and addictive,” he suggests.
So many factors are involved in determining if the time is right to sell your business. What are the prevailing market conditions? How are your financials trending? Do you have everything in ready, in ideal order to maximize your profit? A business broker can help identify and answer all the questions you should be asking.