How to Prepare Before you Sell a Business
How to prepare before you sell a business
Nearly every business owner has heard that to sell a business, timing is important. In fact, when and how to sell a business are two of the most important decisions. External factors – like changes in the economy, availability of funding, and the rise and fall of interest and tax rates -have a profound effect on the value and sellability of a business. But one additional factor should be considered in upcoming years: Baby Boomers.
Just as there are “buyers markets” and “sellers markets” in real-estate, the same exists in the corporate world and all statistics point to the retirement of our Baby Boomers as a pivotal fact that will create an elongated “buyers market” for selling a business. This is due to the large number of Baby Boomers in the 1960s and 70s who chose to start their own businesses and who are now, with retirement in sight, hoping to cash-in (sell their business). In fact, so many Baby Boomers started businesses (and soon intend to sell) that it is predicted 40% of US family-owned businesses will experience a leadership change in the next five years. Translated to monetary significance, this means almost $5 trillion in liquidity is expected to be created by 2015 as a result of business owners transitioning out of their business and into their golden years.
So how are our Baby Boomer owners preparing for these changes in ownership? Unfortunately, they’re not. According to a recent survey in M&A Today, 65% of small business owners don’t know what their company is worth and only 15% of them have an exit strategy. With all of the variables that impact the sale value of a company, it’s disappointing so many owners leave their decisions to sell their business with a approach of “when I get around to it.” An increasing number of business owners are positioning themselves to leave money on the table.
The good news is that all this statistical information provides a clear understanding for how Baby Boomers can succeed when selling a business. The focus is simple: extensively plan and prepare your exit strategy. Exit planning gives those planning to sell their business a significant advantage over others.
Having an exit plan and knowing a company’s true value are two advantages in the “how and when to sell a business”. For Baby Boomers, every advantage will help in their soon-to-be saturated market. Another way a Baby Boomer business owner can gain an advantage over their competition is to know what mistakes the typical seller makes and how to avoid them. The following is a list of what these mistakes are:
- Not knowing the value of the business – Private Business owners minimize profits to reduce taxes. Thus, their company’s financial statements often don’t reflect the true profits and value of the business. They don’t properly prepare recast statements which bring out the total benefits that the business provides.
- Selling at the wrong time – Many sellers wait too long to sell their business, not understanding that one should sell a business when the market is ready. Conversely, many business owners spend a lifetime building their businesses but spend little or no time in preparing their business for sale thus failing to maximize the value of their business.
- Trying to rush the sale – Once an owner has decided to sell, she or he understandably wants the process to be over quickly. But preparation and selling a business can take several years.
- Negotiating with only one buyer – Although business owners may feel more in control when dealing with a single suitor, generating interest from multiple buyers can significantly increase the probability of selling the business at or near the asking price.
- Not understanding the buyer’s motives – Rather than emphasizing the business’ growth potential, sellers often dwell on past performance. Buyers, however, are looking for future revenue projections, return on investment, growth potential, and synergy.
- Inadequate documentation – Buyers expect documentation in the form of 3-5 years financials as well as documented procedures, policies and systems, including recast financial statements and five-year pro-formas, backed by solid research and analysis that shows the potential of the business for new owners.
- Assessing and negotiating offers – Businesses usually do not sell for all cash. Most businesses are sold with some seller financing, earn-outs or stock in the acquiring company. Negotiation skills are vital in many areas including terms of the transaction, personal, legal, tax and financial issues.
Contact American Fortune to show you how to prepare before you sell a business.
By Brian S. Mazar, CBI, MBA