8 Factors to Consider Before You Sell Your Business
June 26, 2019
By Douglas McDonald, CPA
It can be tough to imagine selling your business—something into which you’ve poured so much time, energy, and emotion. This is true whether you’re years or decades away from selling. Regardless of where you’re at, the important thing to know is this: The successful sale of your business starts well before the sales process even begins. Ideally, you should begin planning your exit one to five years ahead of when you want it to happen. Having this kind of lead time allows you to make thoughtful, strategic decisions around ways to maximize your company’s value—and ownership’s return on investment.
At AEM we have had the opportunity to help numerous clients achieve their goals when selling their businesses. In doing so, we’ve identified several key factors to the success of a business sale. Many of these factors are important in normal business operating conditions. All become vital during a sales process in order to protect, and boost, the value that has been built into the business over the years.
To help you prepare for the sale of your business, here’s a quick guide to a few of the most important factors to consider:
1. Identify why and how you are selling.
- Get comfortable with selling.
Questions to ask yourself: Why am I selling? What does life look like after sale? How am I involved, if it all, with the company post-sale?
- Envision a perfect sale.
Questions to ask yourself: Who are the ideal buyers and why? Consider all options (e.g., existing employees, ESOP, family, etc.). What are your ideal and lowest acceptable financial outcomes?
2. Assemble a team of professionals who can guide you through the process.
- Establish a team of advisors to help you reach your goals. To get the most value out of your team, include your attorney, CPA firm, and investment broker.
- Identify a trusted internal team to assist in the process (e.g., an accounting and/or operations officer to help gather financial information and tell your company’s story).
3. Know your business inside and out.
- Know and document your business’ history, culture, strengths, weaknesses, and success stories. Know its risks and establish an approach to mitigate them.
- Know your people: Identify key employees and consider incentive plans to ensure they stay under new ownership. Identify which hiring/firing decisions might be needed. “Get the right people on the bus in the right seats.” – Jim Collins, author of the book “Good to Great: Why Some Companies Make the Leap…And Others Don’t”
- Know how and when you make money (e.g., revenue streams, customers, geographic, sales representatives, seasonality, gross profit margins, etc.). “If you don’t know your numbers, you don’t know your business.” – Marcus Lemonis, star of CNBC’s “The Profit”
4. Get your house in order.
- Be sure contracts and documents are in order, including your contracts with customers, employment contracts, insurance contracts, and leasing arrangements. Leases and other contracts should be assignable to the new owners.
- Ensure your business is in compliance with federal, state, local tax, and other regulatory agencies.
5. Rethink your financial information.
- You should always have timely and accurate financial data available for buyers to evaluate. Inaccurate financial data, especially during the sale process, can lead to increased risk for the buyer and a lower sale price.
- Establish an effective and timely period-end financial close-out process in order to ensure accurate financial information is easily available to you and any potential buyers.
6. Find value in the numbers and control the narrative of what they’re saying.
- Determine a normalized Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) and working capital.
- Determine annual capital expenditure (CAPEX) requirements.
7. Establish and document a growth plan to build value.
- Document and articulate your vision for future growth.
- Create a realistic and supportable sales and cash flow forecast.
- Identify future CAPEX needs to maintain or grow your business.
- Implement growth strategies months to years ahead of the sale in order to present buyers with a positive trend.
- Think outside the box on ways to add value (e.g., new markets, new products, customer prospects, acquisitions, etc.).
8. Maximize value during the sale.
- Identify two to three potential buyers to create competition and to provide a backup in case the initial deal falters.
- Determine optimal timing of sale by considering peak company profitability, market cycle, purchase demand, owner needs.
Let us help you take the first step.
A good rule of thumb to follow, whether you plan to sell in the next year or decade, is to treat your business as if it’s always for sale. Making an effort to maximize value will benefit your business’ current ownership—and not just a future buyer. If you’re ready to learn more about these and other key success factors, please give us a call. Our experience in and passion for seeing our clients thrive has led to many successful business sales and optimizations. We’d love to help you make the most of your next chapter.