How to Sell a Business: Part 2
This is the second of a five-part series on selling your business.
To get the whole picture, read Part 1.
Just like building a business, selling one takes planning.
Selling a business takes planning, first, and following a process, second. Unfortunately, few business owners, especially the owners of smaller businesses, plan for the sale of their business. Few seem to realize that every business that does not fail will eventually be sold or otherwise transferred. Nobody lives forever. If you own a business, individually or with others, it will very likely be sold at some point. Businesses whose owners have planned this eventual sale generally sell for higher valuations than do those that are sold without the benefit of a plan.
Planning ideally starts at the beginning – at startup or purchase. I have started – both individually and with partners or equity investors – several business over the past couple of decades, including Worldwide Business Brokers. Early in my career, I did not consider building a business to sell, whether in the short term or long; I just never thought about it. But in the late ’90s I sold a business that I had not planned to sell at the time. The experience taught me that I needed to have an exit in mind for whatever I did from that point on and the last three businesses I started – an internet-based tradeshow company, a network technology security company and Worldwide Business Brokers – were, from the beginning, designed and planned with an exit strategy top of mind. (Coincidentally, all are B2B – business-to-business enterprises; not that that makes any difference.)
So, why plan? Well, if you don’t have an objective you’re reaching for, you will be unable to measure progress. And as the saying goes, “if you don’t know where you’re going, any road will get you there.”
The Components of Planning
A plan starts out with the basics: time and value. Sure, you want to start or buy a business to support yourself and provide for your family but we’re not talking about the reasons for starting or buying a business. We’re not even talking about the reasons for selling a business. We’re focused solely on getting from beginning to desired end.
Your reasons for selling will probably not even be identified initially and are likely to change over the years you own the business. And, if your reasons for selling involve unplanned life-altering events – health problems, divorce, partnership or shareholder acrimony, family fall outs and the like – they could completely upend your ultimate plan. However, if you have a target and work toward that target – if you have a plan and work that plan – no matter what happens that you can’t control, you will be closer to hitting your target than any other way of getting there.
Planning requires recognizing that your business must be able to run efficiently without you. That is to say that someone can come in and, with some training from you, take over the reins and continue to grow the business. If the business depends entirely on you, you will have a business that is nearly impossible to sell. Your business should be able to function whether you’re skiing in Gstaad with Gwyneth Paltrow or kite-surfing off Nevis with Richard Branson.
Many businesses provide specialized services but if the business depends on the owner to perform those services, the business will be very difficult to sell. As an example, one of our early clients had a specialty metal manufacturing business that he built up from pretty much nothing in his garage to a regional supplier of custom metal fabrication doing about $4 million in sales. We valued the business at just under $1 million. And though, because of the excellent work and service the company provided, their clients had been customers for many years, the owner was still the salesman, designer and he was on every job working with his crew to install whatever they’d just made. The business was him and we had to find a buyer with all his skills, personality and drive, a nearly impossible task. If your business depends on you, look around to see how you can change that.
If your business is large enough, you should be able to develop a layer of management – even if only one or two people – that can handle the hands-on, day-to-day work of the business. The existence of such managers will significantly deepen the pool of potential buyers. It’s still likely that you will need to stay on a while so that the transition goes smoothly but your managers should be able to show that the business can be run smoothly without you.
This specific issue does not necessarily pertain to what we refer to as Main Street businesses, business with under $200,000 or so in revenue but there is a related issue that impacts these smaller business; their name. This is not a huge deal but it will impact the buying decisions of some potential buyers and could, if you finance the sale, impact how the business performs down the road.
By way of example, if you own Main Street Bakery, turning out some of the finest croissants au chocolat and delicious baguettes, the name is of secondary import except as it pertains to the business’ reputation. However, if you own Maurice’s Bakery, some buyers may hesitate (if their names are not Maurice) or worse, in a fit of chest-beating, change the name to Alfredo’s Bakery, an event that will likely have a negative impact on some customers. Such an impact could result in lower sales and if you financed the sale, could impact Alfredo’s ability to make payments.
Getting the Business Ready
So, you’ve worked your plan for the past five, 10, 20 or more years; you’re hitting your target revenues; your financial position – personal and business – is improving annually and you begin to realize that your targets, even as they’ve changed over the years, are coming into view. It is at this point – ideally no less than three years before you pull the trigger – that starting the sale process begins. It starts with getting your business ready to sell.
If you want the highest possible price for your business when you sell, it has to have the highest possible value. It achieves that standard using two approaches. The first is physical; how it looks to the eye when buyers come to inspect. The second is financial; how the books look. The physical can usually be addressed in a more compressed time frame. The financial takes longer.
Buyers generally want to see three years of financial information including P&Ls and tax returns, as well as a year-to-date profit and loss statement and a current balance sheet. Your objective is to show that the business has grown over the past three-plus years and has become more financially rewarding during that period. Reaching this objective accomplishes two things: first, as the financial benefit rises, the business’ value rises and, second, you establish a trend that a smart business broker can use to legitimately “juice” the value.
The physical part of the preparation pertains to businesses that require a physical location to exist; a manufacturing plant or retail store, for example, or an accounting practice’s office or marketing firm’s loft space. This phase addresses things that the buyers of pretty much everything care about; what does the place look like? Depending on the size and condition of the business’ physical presence, you can probably estimate how much time will be required to get it straightened out. This could be as little as 30 days or as much as a year. I discuss both of these approaches in more detail in podcasts. The physical is here. The financial is here.
Next week’s post, Part 3 of How To Sell A Business, tackles the topic of business valuation. “What’s my business worth?” We get that question all the time. I’ll outline the basics of what we do when we assess the value of a business. Make sure you subscribe so you don’t miss any of the posts in this series.
If you have any questions, leave them in the Comments box, below. If we get enough on the same topic, I may do a post or podcast tackling that topic specifically.
Finally, we’ve had several people ask if we have a course to teach them how to become business brokers. I’ve been thinking of putting together such a course and will do so if there are enough people interested in it. So, let me know your thoughts on this, as well.