Preparing for – Rather than Starting – the Sale
“Every business that does not fail
will eventually change hands.”
That is a mantra that we’ve used in our offices and in our marketing for many years. Some businesses will “change hands” in the manner of a generational transfer but most will be sold, either to unrelated third parties or to employees. And preparing for the sale has to start WAY before starting to sell.
Every business owner has to come to grips with this fact sooner or later – and sooner is better. And the sooner an owner does, the greater the chances of being prepared and eventually realizing the highest value for their business when the time comes. And the time WILL come.
As a business broker or M&A advisor, you have the ability to help business owners prepare for the inevitable. And preparation is the name of the game when it comes to successfully selling a business for the highest value.
Preparing or Selling?
“Preparing for a sale” is not the same as starting “the process of selling”. Preparing for a sale means always working with an eye toward value. It also means recognizing that, especially in today’s market, someone just might knock on the door out of the blue with an offer to buy. And if the owner is not ready, an opportunity might be lost.
“Preparing” is being cognizant of what the owners’ decisions mean to the short- and long-term value of their business. Spending a million bucks on a private plane ostensibly to treat clients to wonderful golf junkets in lovely resorts can be justified as a legitimate expense meant to build business. But whatever value it adds to the business is at the margin.
On the other hand, leveraging that million bucks and acquiring a $3 million bolt-on company that can exponentially enhance the business changes value considerably.
What’s the Market Like?
The business acquisition market today is robust. There are more buyers and more money chasing small and lower Middle Market businesses – those with valuations of up to about $25 million – than has been the case in a long time. Private equity groups are on the prowl. Individual investors are in the market. And even “mom and pop” buyers are looking for “mom and pop” businesses.
The economy is robust, interest rates are still low and banks are flush and looking to lend. All this has led to a modest frenzy in the acquisitions market, a condition that is having a positive impact on valuations.
A Possible Speed Bump….
But at the same time, Baby Boomers – the generation most prolific at starting businesses – have begun hitting retirement age. We’ve started to see a growing surge of businesses owned by Boomers coming to market – a phenomenon that has been referred to as The Silver Tsunami.
As this flood of businesses grows, it will put downward pressure on valuations simply due to the law of supply and demand; more businesses coming to market – supply – will, to some degree, offset the fact that more buyers are in the market – demand.
So, if you’re a business broker advising potential sellers – or a business owner that IS a potential seller – preparation is the key.
“But it’s Too Early”, They Say…
Though it might not be something they like to think about, all business owners should at least have some notion about what their exit strategy is. And such a strategy must consider the time it takes to ready a business for sale, the time it takes to market a business to the right buyers, the time it takes to find one or more interested buyer and the time it takes for the due diligence and negotiation processes to play out.
But, just as important is being reasonably prepared if a suitor shows up with a bundle of cash saying they “just have to have” your particular business.
This happened to me, as those of you who have read the post on how I got started as a business broker may already know. I wasn’t ready; a fact that caused a considerable amount of angst.
The Business Broker
For a business owner, having an experienced professional business broker do a periodic valuation on their business is both a time-saver and a marker noting where they are. We do such valuations all the time for those reasons as well as others – such as assuring that the owners have enough life insurance as their business grows to fund buy-outs in the event of the death or disability of one of them.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
Become a Professional Business Broker…
There are several aspects of preparing and of “being ready”. Some – like knowing what you’re going to do post-closing – will probably not be too important until you’re ready to put the gears in motion to start the process – and that goal is likely to change over time, anyway.
Others – especially knowing what your business is worth at any given time – are very important to have a handle on periodically, whether the business is coming to market soon or not.
Where to Start?
If you’re a business broker, you want to make sure that you advise your clients early on that the process starts with good, clean and accurate financial records – and that the records any astute buyer will want to see will stretch back at least three years and, in many cases, five.
Assuming that the financials are relatively clean and will need little more than an in-depth review by a broker, once the decision is made to bring the business to market, the planning process that leads up to actually pulling the trigger can take as little as 90 days. This process includes identifying and assembling the right team, determining the valuation of the business, creating the compelling story, developing the marketing materials and platforms to be used, etc.
If the financial records are unclear – or worse; a mess – and the business’ cash flow has been negatively impacted by the owners milking to company, the planning process will take a lot longer, particularly if someone has to clean up the messy financials. If this is the case, it will be costly to the seller.
We’ve dealt with many businesses whose owners presented us with the “financials from hell”; confusing, mis-characterized expenses, missing tax forms and worse. When we explain to the owners that someone that knows what they’re doing – like an accountant – needs to clean this mess up, they generally come back to tell us that experienced accountants are too busy to take on the project (which is to say that the accountants are implicitly stating that they have no interest in trying to unravel the mess).
In such instances, we often offer to work with the seller to whip their numbers into shape. But we charge an hourly fee for this service and, being intimately familiar with how financials will be looked at by buyers, we’re arguably best positioned to take on this task.
Cleaning up messy financials of business owners that are ready to sell is a profit center for us, as it should be. We bring experience and expertise to the project and, as all we have to sell is our time, we get paid.
The Bottom Line
Preparation is the key to getting the highest value for a business at sale. Most owners don’t pay enough attention to this critical fact early enough. In fact, most rarely think about the end game – until the end. Most owners have no idea what their business is worth at any given time. Don’t be one of them.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
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