Can you imagine getting ready to sell your home and not taking the time to fix it up a little before showing it to prospective buyers? Would you expect an automobile dealer to put a car out on their lot without insuring that it had been meticulously cleaned? Of course not. To do so would certainly reduce the sales price.
The same principles hold true when it comes time to sell your business. The majority of closely held businesses, however, are offered for sale without any significant preparation. You might be thinking that you have no intention of selling your business, so why bother thinking about preparation. The answer is, that ultimately, there are only three things that you can do with your business. You can sell it, you can give it away or you can liquidate it. Giving it away or liquidating it don’t take nearly as much thought as properly selling it. So if you own a business, even if you don’t have any near term intention of selling it, it makes sense to give some thought to the how, who and how much of a sale.
There are numerous versions of valuation formulas, several of which will be appropriate for any particular type of business. All of these formulas have one important variable called goodwill. There is no specific computation for this very important value. Goodwill is a judgment call on the prospective buyer’s part. Proper preparation on the part of the seller can greatly influence this decision.
A common fear of an owner who is contemplating the sale of their business is confidentiality. If I discuss the sale with my attorney or accountant, isn’t that going to change the relationship? And what happens if I change my mind or don’t find a buyer?
Common but unnecessary fears. The problem that these concerns create is that they delay you from assembling an experienced team of advisors that can help you develop a successful strategy. The sale of your business is most likely a once in a lifetime transaction. To your professional advisors it is a routine event for which they are well prepared to advise.
Selling a business is similar to selling a product. Develop a strategy and implement it carefully. With a clear picture of your own objectives, target your key prospects and make a realistic appraisal of their needs, alternatives and resources.
A buyers perception of the value of a business is based on many factors, including the type of industry the business is in and its position in that industry, the company’s reputation with its customers, the company’s potential capacity, the quality and depth of the company’s personnel, the company’s location and its susceptibility to disruption with demographic or technological changes. Ultimately, the real basis of value to the buyer will be the present value of the perceived future cash flow.
It ‘s not hard to see that the way a buyer looks at these issues can be influenced by the way information is supplied and how forthcoming the owners are in discussing these issues. There are a number of actions that you can take prior to beginning discussions that will greatly influence the buyers perceived value.
Make sure that you have a business plan. Buyers will always substantially disregard your predictions for a rosy future. After all if things were going to be so great, why is the business now for sale? However, a well documented business plan will lend credence to your future prospects and position you to negotiate for additional deferred payments based on the realization of those future prospects.
If your business has adopted formalized policies and procedures that document how the business operates, it will be more attractive to potential buyers. A buyer will see less risk in a situation where there is an orderly plan of action for the routine operation of the business.
Remember the example of the house for sale. If you have visitors coming, and particularly if one of them is a potential buyer, spruce things up a bit. Good housekeeping is always a profitable practice, but it is an absolute essential if you are hoping to maximize the selling price.
All privately owned businesses organize their accounting to show minimum profitability so as to minimize their taxes. Public companies generally gear their financial reporting to maximize their profitability so as to show the highest possible earnings per share. The buyers of your business will want to restate your financial statement in such a manner as to get an accurate picture for their purposes. It is important that your records are prepared in a manner that will allow for an orderly and believable “recasting” of expenses.
You will find that these and other steps that you can take to make your business attractive to perspective buyers will also have the effect of making the business more profitable and easier to manage. Even if you decide not to sell, your efforts will be rewarded.
Because it’s your business, remember that a little preparation can boost your selling price.