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Selling A Business
The Selling Process
Prepared Sellers Find a Friendly Market! Many business owners believe that the slow down in the economy makes it more difficult to sell their businesses. In fact, the economy has actually stimulated buyer demand. Investors who have had their cash on the sidelines are looking to acquire businesses as a way to generate higher returns than are currently available in the stock market. In addition, there are fewer businesses on the market with strong cash flows. With such a high demand and short supply, multiple offers at or above the asking price are common in today's market.
Investors believe that business valuations are currently low due to the depressed stock market. They are investing cash now with the hope of growing a business when the economy rebounds. Privately held businesses offer a higher, and more predictable, return on investments than the highly volatile stock market. Buyers can afford to pay a higher price for a business because the cost of capital is the lowest it has been in recent history. Additionally, Congress is attempting to stimulate the economy with increased tax deductions and pending tax law changes to attract investors into the marketplace.
While supply and demand are in favor of the seller, uncertainty in the market is causing buyers to be much more cautious during the acquisition process. Buyers are backing out of transactions during due diligence over issues that in years past would not have been a concern. Minor, explainable irregularities in financial statements, a slight drop in sales/earnings or even a small, short-term dip in the stock market can scare away a buyer. To prevent the devastating financial and emotional effects of a failed transaction, sellers must be in control of all internal factors which can influence the sale of their business. Planning is the key to the successful sale of your business.
Investors will pay a premium for a business with a history of positive, increasing, verifiable cash flow and they will place the highest emphasis on the most recent twelve month financial statement. Any changes you make today to improve your bottom line will take twelve months or longer to add value to your company. Therefore, planning is critical to ensure a successful outcome. Do not wait until your revenues and profits have peaked to put your business on the market. By then, it is too late. Buyers will either shy away from a business with declining numbers or they will expect a significant reduction in price to offset their perceived risk. Clean, audited or reviewed financial statements dramatically increase the confidence level of both the buyer and his outside advisors.
Investors want businesses with strong growth potential but they value businesses based on historical cash flows. Investors will analyze prior sales/profit trends to determine their own expectations of growth. Unrealistic, hockey stick projections by sellers only serve to weaken credibility and provide investors with ammunition to negotiate payment terms based on future cash flow.
So how do you maximize the value of your business? At least two years prior to placing your business on the market:
o Determine the price you need for your business to meet your financial objectives. Be sure to analyze the tax implications - it's not what you sell it for, it's what you put in your pocket that counts.
o Design and implement a business plan which will realistically allow you to reach the income level needed to obtain that price that meets your objectives. Be sure to include your plans after you sell.
o Eliminate unprofitable customers who waste your time and focus your energy on your more profitable customers.
o Do not allow a small number of customers to make up a large percentage of your revenue. Diversify your client base to minimize the impact of the loss of any one account. Buyers are risk adverse.
o Groom key employees and managers so that the success of your business is not dependent on you. Buyers are not buying you; they are buying your ongoing business.
o Clean up your financial statements by eliminating excessive personal or non-business related expenses. Normally, business owners work hard to minimize their taxable income but this works against you when it comes time to sell your company. Consider having your financial statements reviewed or audited.
o Turn under-utilized assets into cash. Get rid of slow moving/obsolete inventory which is tying up your working capital. Sell off unnecessary equipment and remove your personal assets from the company.
o If you own the real estate, charge a market rent to the company. This allows you to set a fair market value for both the real estate and the business. These are two separate transactions and each must stand on its own merits.
o If you lease your facility, make sure your lease is assignable and work to remove any personal guarantees.
o Perform an environmental audit to avoid any surprises.
o Resolve any outstanding legal disputes. A small legal claim can raise larger concerns and doubts for a buyer.
o Develop a team of trust advisors to counsel you on all aspects of the transaction. Listen to their advice but do not let them make your decisions for you.
o Focus on running your business as if it were not for sale. Don't become distracted by buyers.
o LEAVE NOTHING TO CHANCE! By controlling the process, you minimize your risks and maximize the value of your business!
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