A competent business owner should always have an exit strategy when it comes to his business. Unless you are going to pass the business to a family member or eventually close the business, there will come a time when you will sell.
Increase cash flow
When time comes, cash flow is equivalent to location in real estate. Cash flow is the main variables that buyers consistently review when they are evaluating a business. They are hesitant to purchase a business with cash flow on the decline. If they do, the value they are willing to pay is usually at a significant discount. Buyers are leery anyway since they feel that sellers must be hiding something. Decreasing cash flow is very difficult to validate as a reason for selling.
Get out of your own way
The business owner who reminds people of “Norm” from the sitcom “Cheers”—where everybody knows your name—may be great for business but could be harmful when it comes time to sell the business.
In order to maximize the market value of a business, owners have to disassociate themselves from the business and have customers, employees, and suppliers sign on because of the business, not the owner.
The best method of removing yourself from a business is to train your right-hand person to take on some of your responsibilities, including dealing with customers, employees and suppliers.
Develop a management team
In addition to removing yourself as the point person, developing strong management is equally important. A buyer can review financials and inspect equipment and inventory to determine value. This analysis is clear-cut. One of the major factors that will move this value up or down is the quality of the employees. How long have they been there? Will there be key employees to assist the new owner with the business?
Replace family members
Having family member work in the business is one way to build a business. It could also be a huge detriment when the time comes to sell. A prospective buyer will be very concerned if a seller’s wife, son, brother, etc., because he’s skeptical of employee retention. Even if the family members agree to stay on after the sell of the business, the buyer might still have other doubts. It is common for family members to be paid more than a regular employee doing the same function. That could alarm a buyer. There might also be a perception that the family member may not be as qualified as he or she could be and got the position because of nepotism. This might lead a buyer to wonder if he is getting the best available person for the job.
Reduce the amount of untracked owner perks
Most small businesses owners “live” out of their business.
In the small business arena, if you have hired a good accountant, the net income on the year-end tax return is usually between $0 and $100,000. This does not mean the cash flow to the owner is low, since the difference is usually in salary and owner perks. These owner perks can include health insurance, auto insurance, meals, entertainment, travel, and personal purchases. Even though these perks are valid, often first time buyers have a difficult time understanding them all and might dismiss them in their cash flow analysis.
EBITDA plus owner salary is the most common form of cash flow to a buyer. In a small business, owner perks can often be a large percentage of the total cash flow to owner. Since leading institutions and buyers focus on EBITDA, it would be wise to reduce or eliminate owner perks for one or two year prior to selling a business. In additio ss. n to reducing perks, it is mandatory that the perks you continue to expense be paid through specific and verifiable expense line items.
Sell off the unwanted inventory
When marketing a business, it is difficult to obtain a price based on the assessment of assets if they are not necessary for the operation of a business. By selling the assets in advance, the business owner gains added revenue from the sale of assets and a better business package to sell.. The sum of the parts should always be more than the whole when it comes to selling unnecessary assets and then the business. Get rid of the unnecessary items you have accumulated, tighten up.
Like unnecessary assets, inventory should be kept at a minimum in order to help keep costs low and help you set a selling price at a level to maximize the number of potential buyers.
A buyer will not pay for dead inventory. Before closing, most buyers will take inventory to ensure that what he is paying for is there and in good condition. Dead, obsolete and/or excess inventory can hinder a business sale. A buyer will only want the inventory that is necessary to run the business. If inventory levels are too high, the buyer might not be able to substantiate or afford the sale price with the excess inventory included.
Diversify the customers
The old adage, “Don’t put all your eggs in one basket,” applies to a business’s customer base. Diversifying the customer base will not only increase the chances of selling a business, but also will help create a steady cash flow and reduce the impact of losing a customer.
Since key employees are vital to a business, an employee chart acts as an outstanding tool to summarize the team. The chart includes: tenure, pay, position, and description. Having a view of the staff will make it easier for a buyer to evaluate the employees and objectives.
Reduce Unnecessary Purchases
If large purchases are needed but not essential, let the buyer decide if he wants to make an investment. It will be easier to offer a business at a price that does not include a recent large purchase.
Additional steps used to prepare for a later sale:
• Eliminate the fat when it comes to employees
• Have written procedures for operations (i.e. employee manuals)
• Have accounts receivables high
• Keep accounts payables low
Time to say Goodbye?
For most people, selling a business is a whole lot easier than starting one, especially if you have professionals on your side who know how to show it in the best light and make the most of what you’ve built. The emotional turmoil of letting your baby go is often the hardest part.
With experienced help by your side, you can avoid some of the emotional turmoil and many of the hassles that come with any complex and unique transaction. And every business is unique. Selling one is complex. Let Peterson Acquisitions help you prepare your exit strategy and assist you when you are ready to sell your business. We have a staff unmatched in the industry. We are here to help. Contact us today.