Business Owners’ Special Series #8
Why would someone buy your business? This sounds like a simple question, but don’t kid yourself. If you are going to take a good, hard look at your business and answer this question, you have to learn how to see your business through the eyes of a potential buyer – that is not an easy task. You might be surprised by how critical a buyer can be when examining your business and preparing an offer. If you take the time to look at your business through the eyes of a buyer and properly prepare your business for sale, you will be more likely to agree on a price and terms to an interested buyer.
According to a nationwide survey performed by the Exit Planning Institute, over 70% of businesses that go to market do not sell. The alternative is accepting a lower price than you intended, or failing to sell when you cannot find a buyer. Consider looking at your business through the eyes of the buyer:
- Let’s start with some basics. You will need to have articles of organization and evidence of ownership. Can you prove your business license is up to date and your fictitious name registration? Demonstrating ownership information, corporate formation and evidence that your business is in good standing with the tax authorities is critical. No one wants to buy a business with sloppy records, as they represent hidden liabilities to a buyer.
- Your people and HR polices are also very important. Do you have a recently-updated employee handbook? Do you have a hiring process, employee development plans, training systems and retention strategies in place? Having documentation of such systems that a buyer can review will give the buyer confidence in your HR systems and demonstrate the value of your company and your people.
- Next, let us look at sales. Have you documented your sales processes, goals and results? Can you show historic financial information about each product line and customer? Do you have revenue forecast for at least three years? Are previous forecasts on track with historic sales records? You want to be able to demonstrate that your business has a predictable and/or growing revenue stream. A buyer is looking for an investment, and they won’t invest their money if they cannot see how they will reap future rewards. Forecasting is a great tool to demonstrate the value of your company (their investment), but are only useful if they have credibility and include a realistic basis for the projected revenues.
- Other items a buyer will want to review are financial statements, tax returns, customer contracts and other financial records. Any and all contracts will need to be available and should be reviewed ahead of time to determine if they are favorable for the buyer. If the business has any contracts a buyer may deem unfavorable, it may be seen as a risk to their investment. You will also need to be able to demonstrate that you are current on all Federal, State and Local tax filings and that your business is in good standing with the Secretary of State. Buyers will not take on the responsibility for the related risks, if you are not.
These are just a few examples of things you will need to demonstrate to a buyer that your business is worth the asking price. The key is to view your business as an outside investment. Start with simple questions like “How does the business make money?” and “Can I prove it?”
Getting your business ready is just one piece of the sale. You also need to get yourself ready. Prepare for a buyer to ask why you are selling and have a solid, fact-based answer ready for them. Is it because you want to get rid of the headache of running a business? Or is it time to move on? Also consider what you will do after the sale. How important is the sale price for you to complete a sale transaction? Do you know how much you need to sell your business for, so you can support yourself and your loved ones after a transaction? Is there a gap between how much you need and what your business is worth, today? Buyers often want to know the seller’s motivation for selling. A seller who cannot afford to sell at current value will back-out when it comes time to actually sign a sale contract and walk away. Buyers want to see some evidence early on that they are not wasting their time, effort and the expense of evaluating your business and preparing an offer and eventually a purchase contract.
If a serious potential buyer came into your business today to examine all of the business processes, systems, documentation and financial records, would you be prepared to put a complete a package of documentation on the table? Remember someone may be interested in buying your business, but you need to prepare as early as possible to get an offer close to your asking price.
Preparing your business for sale at the highest potential price is rigorous process that takes time and energy. It takes a seller who is focused on developing the business to the highest potential price, who is willing to focus on executing a Value Acceleration Plan in their business and work on that plan every day. As Certified Exit Planning Advisors, we review over 200 factors and then focus on the areas that would be of concern to a potential buyer to prepare a Value Acceleration Plan. After identifying and addressing key areas such as the above and more, an action plan is developed and execution of the plan begins. Through this process you begin to learn how to see your business through the eyes of a buyer to grow the value of your company.
Invest the time now to improve your business to attract a buyer who will pay a price that meets what your business is truly worth. Contact BPM’s Value Acceleration and Exit Planning team and start today.
Rich Gunn leads BPM’s Value Acceleration Service Team, which helps with succession, transition and exit planning for business owners. Rich is a Certified Exit Planning Advisor and a member of the Exit Planning Institute.