Whether your business was built from scratch or you have been building it brick by brick for many years, it is essential to prepare to place a company on sale. These steps will help increase the value of your business upon closing.
Assess the value of your business
The first step is to create an objective valuation.
Many business owners mistakenly assume that their company’s worth is determined by how much they have invested in it. Although inventory and assets may be a factor in the sale price of some businesses, this is not how most investors value acquisitions.
Potential buyers won’t care how much you spent on marketing, building, and improvement. Potential buyers are not concerned about the return on their investment. They may base that calculation on an expected annual return or payback period. Potential purchasers will not establish their valuations on the owner’s sunk costs. Instead, they will use a multiple of the company’s earnings or revenue and a multiple that is based on comparable sales. A better option is to use discounted cash flows, which calculate the future value of a business’s cash flow after adjusting for business risk.
Strength in Numbers
You must have a good understanding of your financials before you can value your company. You might have maintained good financial records over the years. Or maybe you handed your accountant a shoebox stuffed with receipts and stacks of credit card statements at year’s end.
Someone buying your business will expect several years of clear financial statements–typically following GAAP standards. You might consider using this professional standard to restate financial statements if you keep track of your business in cash. Buyers usually require at least three years’ worth of financial information. Buyers prefer to have financial accounts audited or reviewed over unaudited and internally generated reports by an accountant.
Your Story is Straight
Your data is the story of your company. You should start tracking your data if you haven’t done so before. You should monitor your accounts receivables, payables, and sales pipeline’s aging and status. This will help you to track all of your monthly expenses. You should see trends in critical metrics such as revenue, income, and profitability.
It’s also a bright idea to eliminate unnecessary expenses that are not relevant to a buyer of your company (e.g., vehicle, travel, and entertainment expenses). These expenses should be removed from company financials or, at the very least, pulled out to provide an adjusted EBITDA figure. Buyers should be notified if unusual or infrequent expenses are reported to them.
Shine On
You can now compare your business to industry benchmarks once you understand your company’s financials. You can take steps if you’re not performing well in any area before putting your company in the marketplace.
It might be worthwhile to do essential marketing to increase revenue if it is not happening. Public relations and advertising might be options. You might consider improving your company’s SEO rankings or targeting social media advertising.
To improve your bottom line, tighten your expense management if you feel that it has become loose.
Increase profitability
You can cut costs while increasing efficiency by focusing on areas you can.
Examine insurance and other contracts. You might find better deals if you haven’t looked for vendor relationships in a while.
Have a hard look at the headcount. Are you overstaffed? Are you looking to cut labor costs?
Take a look at your capital expenditures and inventory. Are you carrying more inventory than is necessary? Do you have more stock than is necessary? If so, reduce your list and lower the price of goods sold. Are you spending more capital improvements than you should?
While you don’t want drastic cuts to the business that could lead to a loss, you don’t want it to be so expensive that it is impossible to sell.
Establish Processes And Documentation
After purchasing your business, investors don’t want you to reinvent the wheel. Document your processes if you have them. If not, you should.
The documentation of processes and procedures will enable the new owners to continue running the business after you have moved on. Buyers want to see that the company can run itself.
Know your assets
Your business will be valued based on its earnings. However, it is possible to increase the price by leveraging your physical assets (such as buildings, vehicles, and office furniture), allowing you to purchase more. Your company’s website and any custom-built software are valuable.
The Gang is All Here
You will need a professional advisory team, regardless of whether this is your first or second business. An attorney should be part of your team to assist with contracts and an accountant to ensure that all financial and tax information is recorded correctly. A broker may be an option to assist you in negotiating the deal. A broker is equivalent to a real estate agent when you sell your house. They are paid a percentage of your sale price to use their expertise.
Know your exit strategy
Is the buyer going to pay cash? Is there a target payment or earnout? Consider how long you are expected to stay with the new owner and whether there are any restrictions (e.g., nonsolicit agreements or non-compete agreements). What representations or warranties can the buyer expect of you? What obligations does the buyer have in the future?
