The reasons for selling a business are many and varied; in the end, however, the desired result is the same – money. So how does one prepare a business for sale at a higher price? The obvious answer is to sell when the business is doing well. A thriving business will excite buyer demand. Many of the same actions that produce a successful business are the same actions needed to prepare a business for sale.
Unfortunately, not every business will reach its maximum potential before an owner must consider selling. Just as some “fixer-upper” houses are sold at extremely low prices, a middling business will only receive moderate offers (at best), leaving the buyer in a position to put more money into improving it. To prepare a business to sell for a higher price, an owner must “renovate” the business just as a home would be renovated. The key is to audit the company to determine which renovations will increase the value of the business.
Conduct a Holistic Business Review
A smart business owner will reach out to a support system of people who are affiliated with the company (lawyers, vendors, accountants, etc.) and ask for an honest assessment of the business’s vulnerabilities. Often these people will have useful insights they are happy to share, but they likely would never have shared them unsolicited. Consulting these associates is a worthwhile endeavor; while a business broker can review books and offer essential expert opinions on the business and the current market, the company’s business contacts have an intimate knowledge of the daily workings of the operation, allowing a unique perspective.
Expand the Customer Base
Many small businesses rely on a minority of customers who generate a large percentage of revenues for the company. It is valuable to have a handful of loyal and consistent customers, but a buyer will be wary of any customer that comprises more than 20% of revenues. After all, a customer who was loyal to the old owner has no interest in remaining loyal to the new owner, and potential buyers often avoid this type of relationship. Reducing customer concentration will aid in increasing the reliability of the business’s potential revenue and will enhance the company’s value both in selling price and in terms of salability.
Strengthen Core Competency
Potential buyers are more drawn to a company with a concentration on strong core management rather than one that is going in many different directions. To prepare a business to sell at a higher price, an owner must make sure that all members of the management team share the same focus. A common direction, combined with the production of merchandise and services that add to the value of the core business, will elicit higher offers.
Reduce Industry Specialization
A specialty business may have a competitive advantage in a particular industry due to its industry expertise, but it will also be more susceptible to negative impact if the industry suffers a downturn. A lack of diversity can be a great risk. In general, industry concentration is undesirable to potential buyers. Diversification of the industries served is vital to prepare a business to sell at a higher price.
Increase Your Take-Out Multiple
A business’s asking price is often a multiple of a profitability measure (such as EBITDA or SDE). The typical multiple can be three to ten times said measure, and there are many factors that can affect that multiple, both quantitatively and qualitatively. Strict operational and financial plans will help improve those factors (new flooring, higher margins & profitability, etc.), but workplace motivation and excitement are also effective and will transfer to investors. The value of the business can be increased significantly by performing best practices. Increasing the multiple from five times the profitability measure to six times the same measure can have a significant impact and often may even mitigate tax consequences of the sale.
Selling a business can be an overwhelming undertaking, and often it is easy for a business owner to become more focused on a sale than on the business’s current performance. Fortunately, all changes made to sell the business at a higher price are also changes that will benefit the company overall. In fact, these changes are appropriate at any time during the life of the business and will increase profits. The sooner these improvements are made, the better the position for the business when the time to sell becomes a reality. With the help of an experienced business broker or M&A intermediary, a prepared business owner will retain a place of power, fielding multiple offers in an auction atmosphere.
Many of the same actions that produce a successful business are the same actions needed to prepare a business for sale.