How to Sell Your Business for Top Dollar
How to Sell Your Business For Top Dollar
By Rick J. Krebs
You’ve reached the point where you’re considering selling your business. How do you get the maximum value from this asset into which you’ve poured your heart and soul?
Ideally, you have a year or so to get your business ready to sell. If you’re thinking sooner than that, don’t despair! You may be fine. Rate your business against these tips to know if you’re ready. If not, get to work quickly to align your business with these seven tips.
#1 – Think turn-key operation.
Could you hand the “keys” to your business over to someone without the business skipping a beat? Look critically at your operation. If the business practically runs itself, you’re ready to sell and get top dollar. It it’s not, you can still sell, but you will get less money. If not, identify what needs to be done to get there. You can make the necessary changes while you are selling your business. Having a solid management team in place is paramount to getting the most profit for the sale of your business.
#2 – Develop a succession plan.
This is closely related to Tip #1, but at the highest level. Who is in charge when you’re not there? Do they have the skills to do your job permanently? If not, identify what it will take to get them to that point or find someone, inside or outside the company, who can be trained to take over.
#3 – Refine your customer base.
Is your customer base growing? That assures your buyer that revenues are likely to keep increasing.
What portion of your business is from repeat customers? If you have a lot of repeat customers, your buyer knows that revenue is stable.
Finally, what portion of sales comes from your top customer? The more diverse your customer base is the less risk your buyer will see in your business. A key factor buyers look it is what is your customer mix like? Do a few, key customers comprise a large percentage of sales? Diversity of customer and supplier base is attractive to buyers. If you have a few, large customers or suppliers, go get some more to add to the mix. The reason for this is the loss of a single customer can be devastating to a business, thus putting downward pressure on selling price.
#4 – Maximize your operating profit.
Operating profit is what’s left over after you subtract all your costs, except interest expense and income taxes on your business, from your sales. This is sometimes referred to as EBIT (earnings before interest and taxes) or EBITDA (earnings before interest, taxes, depreciation and amortization).
Ultimately, your buyer is likely to base his or her price on your operating profit. Take a note from public company executives and think shorter-term. Your horizon is whenever you plan to bring the business to market. Your decisions should maximize your operating profit by that time. I know, this is the OPPOSITE of what you want to do as a business owner, but it is what you NEED to do!
#5 – Clean up your Balance Sheet.
Ideally, when you bring your business to market, there is no long-term debt. This assures buyers that your business has sufficient cash flow to pay off debt and/or fund projects without it. It also gives you more flexibility in structuring a deal with your buyer. Meeting with a good business broker before you start to market your business is a good idea. He/she can help identify items that need to be cleaned up and what areas need work. While you are at it, clean up the Income Statement as well.
#6 – Invest in good financials.
Most buyers, especially sophisticated ones, will prefer to see financials that have been prepared by a CPA. There are three levels of financials:
- Compilation – a CPA prepares your financials with information you provide.
- Review – a CPA prepares your financials after investigating your internal procedures.
- Audit – a CPA prepares your financials after significant internal and external checks.
An audit will provide your buyer with the highest level of assurance. It is also the most expensive. So it may not be worth your investment, depending on the size of your business. Talk with your CPA to determine what’s best for you.
I would recommend getting at least a compilation. This will cost you some money, but it will payoff in the long run. It helps put the seller at ease about the financial information they are getting. It also shows your seriousness about your books and records.
#7 – Invest in taxes.
This goes against the grain for a lot of business owners. For years, you’ve done everything you legally could to minimize your taxes. Now you’re supposed to “invest” in them?
The answer is a resounding, “Yes!” You may be taking out some perks that you know aren’t necessary for your business. But do you expect a buyer to believe that? Would you? Show a higher income and pay more taxes. It’s highly likely you’ll make it up in what a buyer will pay for your business.
Make sure you identify any and all expenses that are discretionary. These usually are: cell phone bills, auto, meals, travel, etc. These are valid expenses for a business owner, but the new owner may or may not choose to incur.
Rick J. Krebs is the co-founder of the Business Sales Group located in Murray, Utah, serving all of Utah. He founded and spearheaded the successful growth and operation of Liberty Mortgage and United Mortgage. As a CPA, he worked in public accounting for 3 years in Nevada and Utah. Has a Master of Science Degree in Accounting and Bachelor of Science Degree in Accounting from Utah State University.