Selling your business is when things hopefully come together for you: all the hard work over the years is rewarded – you get a lump of cash and ride off into the sunset. At this, this should happen if you’ve done all the homework and made your business as saleable as possible. In this article we continue to look at some of the things you need to do before you sell.
Reduce risk, especially concentration:
Most SMBs suffer from concentration risk, particularly in the areas of suppliers, customers and product line. A business that has a great relationship with their sole supplier for 5 years might think they’re doing fine, but they quickly learn the opposite when the supplier changes terms, licenses a competitor, is bought, or goes under. Having only a few customers or selling only a few products carries similar risk: things change, relationships change and when they do your ability to price often goes out the window and the value of your business does with it. So a key step in preparing your business for sale is to reduce concentration risk in these three areas. Actively seek out alternate sources of supply. Make sure you have several suppliers who you can buy from. Actively seek out new customers, and diversify your product range. It’s highly unlikely that you’ll be attractive to a buyer unless these risks are already diversified.
Make your revenue predictable:
You want to make your business into a money making machine. You must get to the point where you know that if you invest $100 today it should spit out $150 or more in a few days/weeks time. Then you can make a call as to how much you invest now and how much of return you expect in what timeframe. More importantly, the buyer of your business can see this too and will quickly understand the opportunity. To get this in place you need to invest in marketing systems: identify your target market; understand how they buy and how they make purchase decisions. Make sure you tick off each box. Show what campaigns you’ve tried and what their success rate has been. Track the entire sales process, gather feedback along the way and ensure you know your Net Promoter Score. These systems all take time and patience to set up, but they’ll give you a far better idea of whether you should be selling your business at all, and if you still decide to, it will help a buyer understand the value of what they’re buying.
Remember that the buyer has many choices, but so do you:
If you want to sell your business you need to standout from the others that are also for sale, and there are many. Luckily most of them are really not worth much, so if your business is well run, if the sale is well packaged and presented, and if you’re not in a rush to sell then you’ll immediately be in the top 5%. The buyer will hopefully have looked around and decided that your business is the one, but more likely they’ll be cheeky with asking price and back off unless convinced they’re getting a bargain. If you’ve done your homework, and taking the effort to a proper DCF valuation then you’ll easily understand whether it makes sense to take a particular offer or keep the business because you’ll know what it’s worth to you in cash terms. You’ll also be able to show this to a buyer to justify your price. Preparing early and properly are key steps towards keeping your options open and making the purchase of your business the only really good option for the buyer.
Selling to a strategic buyer v financial buyer:
You’ll almost always make more money and sell your business in less time, by selling to someone in your industry (or one adjacent to it) than a purely financial buyer. The reason has to do with both better understanding of the business by the buyer (i.e. they more accurately price the risks involved because they know them already) and that an industry buyer can probably reduce costs by sharing sales efforts, distribution facilities or some other cost with their existing business. The corollary to this is that an industry buyer will probably already know if your business is a good one or not. They will have been your customer, supplier or competitor for years. This is how ‘walk in sales’ happen: an industry player arrives at your door one day and asks if your business is for sale, entirely out of the blue. What this means is that you should always be ready to sell and have an idea of how much your business is worth.
Document in advance:
Well-run businesses sell more easily than poorly run businesses, for obvious reasons. A well-run business will have systems in place and its documents in order. So, you need to get your records together long before you plan to sell. Show monthly management accounts, board meeting minutes, marketing plans and results. Employment contracts, annual regulatory returns, tax clearances, contracts and insurances. Including your lease and escalation terms. Key employment contracts, disciplinary notices etc. Get everything in order. Put physical copies in a nice big file. Or preferably scan anything physical and store digital copies somewhere – these are far easier to share with prospective buyers and you’re less at risk from someone losing the file. Getting this stuff together in advance will make you better run, and it will also make you better run. You’ll be able to answer any question about the business almost immediately too, which itself makes the business more attractive.
Get a regular, independent valuation of your business:
Research shows that businesses that have been independently valued sell far faster – the reason for this is that the price is more realistic from the start, and also that a skilled, qualified person has cast their eye over the business already. The other main reason to get a regular valuation is that the Discounted Cash Flow value of your firm is an important target against which you can incentivise staff and deploy resources. The result is that they are shooting in the dark, under-perform and achieve lower selling prices as a result.