We have known for a long time now that a major shift was going to take place in the small to mid-size space as Baby Boomers sell the businesses they started and grew. Many of these entrepreneurs assume that they will get their asking price and that the timing of an eventual sale will meet their targets. Unfortunately, this is not the case. A significant amount of planning must go into the selling of a business long before the business “goes up for sale”.
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These are the three most important steps to take prior to selling your small business according to Stephan May:
1. Identify your goals
When you play any card game, what is the first thing you do after the dealer hands you your cards? You look at your cards, and place them in an order that will hopefully lead to a winning hand. You can’t play the game well if you don’t know how you are going to play that hand. Regrettably, too many business owners wait for an unsolicited offer, and then they start playing right away. It takes time and reflection to see all the potential moves you can make with your hand.
Here are three questions every owner should ask himself or herself before embarking on the sale of their business:
- Why does selling now feel right?
- What is my ideal outcome? Is it a full or partial sale, management buyout, or am I looking for a financial partner such as a Private Equity firm?
- What is the ideal outcome for all the other stakeholders (employees, spouse, shareholders, etc.)?
Really understanding your goals will shape how and to whom you may ultimately sell your business.
2. House cleaning
What steps are required to make sure the business is saleable for the highest price?
It is common for a business owner to assume that they are ready to sell. However, until they go through the process, it is hard to articulate the challenges that lie ahead. Without a doubt, selling a company will be one of the hardest things an owner will go through.
In our home life, we all live with things that we just get accustomed to – a squeaky door, burnt out light bulb, hole in the wall, a loose railing. In a business, we have things set in a way that works for us, but not for a buyer. We become so accustomed to the way things are that we just can’t see them as a problem.
Examples include, no employee contracts, one customer that does 50% of the revenue, weak reporting, outdated corporate records, undocumented processes, old inventory, etc.
Not addressing those issues in your business before going to market is the equivalent of doing a home renovation while hosting an open house, and yet, that is often what we do when we try to sell a company without having prepared it for sale. Consequently, the most important thing a business owner can do to maximize the value is to clean house.
3. Financial Planning
How important is it to integrate your retirement goals as part of selling a Company?
We go full circle to point number one: What are your goals? Planning an exit is challenging if we are in the dark about the value that we might achieve from the sale. Though we never claim to know exactly what a company will sell for in the open market, we generally can get a good range. It is important that shareholders distinguish what a company may sell for from what they may need or want for retirement.
Therefore, we suggest that any business owner seek professional help from their accountant, tax advisor, a business valuator or M&A advisor, and a wealth advisor to determine if their financial goals can be satisfied.
There is so much to consider, so do not wait until you are forced to sell – sell on your terms and on your agenda if you can!
View the entire selling a business series here