How To Build Value In Your Business and Sell it for Top Dollar

Three Sure Things

We’ve all heard there are two sure things in life, death and taxes, but for the business owner there are three – death, taxes and selling your business. That is unless you’ve figured out the whole “live forever” thing and haven’t told anyone. OK, there is one other option – to close it – but rarely is that a choice, usually it’s an ultimatum.

There are various ways to sell a business, but no matter who you sell it to or how you structure it, the more value there is in the business the more options you’ll have, the more money you can make and the greater likelihood there is what you’ve worked years or decades to create can have a life beyond you. Don’t forget this ugly little stat- 60% of business owners who want to sell their business can’t get a deal done. Not a fun thought.

Who Are The Most Likely Buyers Of Your Business?

Selling a business requires a buyer. Knowing where to look for a buyer before you are ready to sell will help you strategize, make decisions and prepare you and your business for the sale. Knowing the best buyer for your business can make what could be the worst situation in your life be the best.

  1. Competitor or synergistic buyer – many businesses grow by acquisition, purchasing businesses that either compliment or match their own industry. Do you have a competitor or complimentary business you would feel comfortable approaching? Set up a lunch with the owner or CEO and ask some big picture questions. You don’t have to ask the outright question, but you don’t have to completely avoid it either. A casual conversation will open doors and may even plant an idea leading to more conversations…and an eventual deal.
  2. Customer – sometimes a buyer is a regular customer who finds out a business is for sale or approaches the owner and asks. It’s usually not healthy to broadcast to customers you’re selling, but a careful examination of your current customer base could reveal someone worth having a conversation with.
  3. Financial – many companies are purchased by a person who recently sold a business or inherited a large amount of money, or by an investment group. The amount of money floating around looking to buy a business is astronomical – something like a trillion dollars!! A great motivator to make sure your business is spit shined and ready to sell.
  4. Individual – your business can be marketed by a broker or otherwise listed for sale and a potential buyer is simply someone looking to get into your particular industry without having to build the whole thing from scratch. Using a broker could be a great way to find a buyer, but know any broker may get a fairly large piece of the sales price…and at the end of the day you still need to have all your ducts in a row to see a deal through to the end.
  5. Family members – kids, siblings or other relatives may want to be the buyers of a business…or the owner may see them as the best or only option available. This option reminds me of the old Clint Eastwood movie The Good, the Bad and the Ugly. It may be a beautiful solution, it may cause strain in the family, or it may destroy it. 30% of family businesses go to 2nd generation, 12% to 3rd and only 3% to 4th or beyond. If done correctly this can be the strongest, most healthy business there is. If not, well, Thanksgiving dinner will never be the same.
  6. Employees – This option is often seen in businesses in specific industries (manufacturing and construction are most common) and usually done through an ESOP (Employee Stock Ownership Plan). Reasons for this method being less typical are many, but include corporate culture, highly profitable P&L, strong management, and an owner willing to sell their shares at “fair market value”.

What Is Important To A Buyer?

When my kids were little I told them the same thing you did. Sweetie, that baseball card/video game/bicycle is only worth what someone will pay you for it.” Buyer’s motives vary, but the goal of any transaction is called win-win. The process of negotiation, due diligence and finalizing a deal includes each party “giving in some”, but the hope is a seller who can feel like they received a fair, albeit less than desirable deal and a buyer who paid more than intended, but knows they can build what they bought into something even greater.

  1. Profit – everyone who buys a business needs to see profit in the business. The final sales price will vary depending on a number of factors: what industry is the business in, what are gross revenues, how much attention will they need to give it and more. The range and reasons for a purchase price can be extreme – from a simple asset sale to a strategic buyer willing to pay top dollar for a desirable business, but a good rule of thumb is a 20% ROI annualized and 3-5 year payoff.
  2. Owner is dispensable – Some businesses are so reliant on the owner it couldn’t possibly succeed if the current owner were to leave. From a buyer’s perspective, that’ a red flag. If the business depends entirely on the owner, the business is not salable.
  3. Systems – knowing a business is well run and has systems in place to follow is incredibly valuable. This gives a new owner the assurance once the current owner is gone, the employees have a road map to follow. They may change things a little…or a lot, depending on a number of factors, but a systematized business is a valuable business.
  4. Best practices – if your business has a visible accountability loop, it will attract the best buyers. A track record of setting expectations, training and resources for employees, performance assessments and appropriate feedback/consequences will not only build a great business, it will make it an attractive acquisition.
  5. Brand – this category is often misunderstood. An owner thinks their company has an amazing amount of goodwill (brand value), attaches that to the sale price and overestimates what the company is worth. The buyer may see value in the brand, what it is and what it can be, but without their continued efforts and hard work, the brand will be worth nothing in a short time. A strong brand has value, but more in ‘added value’ than in tripling the purchase price of a company.
  6. No skeletons – any company that has lawsuits against it, has lost an audit, has labor issues or other problem areas may make a company hard to sell. Keeping things above-board, having accurate financials, great employees, a clean and organized workplace and more will make a company desirable.

It’s Not Too Late!

If you didn’t build your business with the intent to sell it is not too late; there are many things you can do to increase the chances you’ll be able to sell your business. Just as one can lose weight, get in shape or become well-read, a business owner who has failed to implement good practices can change.

The reality is it is harder to change these things after a track record of not doing them has been in place for a long time. But it can be done! It will be hard and may take outside involvement and cost a lot of time and money, but the alternative is not good.

Make Money On The Sale

If you are going to sell your business for top dollar you may need to wait a while before doing so. If after you read the list below you have most everything in place, you may only need a few tweaks and you’ll be ready to sell. If you read the list and each paragraph makes you more and more uncomfortable with the position of your company, you should put a plan and timeline in place and not sell your business until it is in top shape.

Just like selling a car is much easier if it is detailed before the buyer looks at it, a company that has been spit shined is more attractive to a potential buyer. And if you list it too early you may lose the chance to sell to the one or two parties that have a real chance of being the final buyer.

Critical Areas For Selling Your Business

  1. Financials – having accurate and complete financials is number one to making the most money from a sale. If an owner says, “Well, I took out an additional $50K every year, I just didn’t report it on my books“, that really means, “You can’t trust anything I say because I am a cheat“. Have a complete accounting of all income and expenses, an up-to-date P&L and balance sheet, and be able to financially justify your selling price. Show what you made as owner, the perks you received from the company and the profit the business produced. Every business, profitable or not, will benefit from at least 2 years of accurate and clean financials.
  2. Take time off – If you work 80-hour weeks, haven’t had a vacation in years and keep your phone on at all times, you have a business too dependent on you. A buyer must feel they can run the business. They can choose to work as hard as they want, but if they see a business that runs without the direct and daily involvement of the owner, that’s worth a lot!
  3. Systems – Everything your employees do on a daily basis should have a system to train, guide and oversee them. New employees are trained without needing to pull from the tribal knowledge of an owner or employee. Get all the good stuff out of the brains of the employees and on paper. Make everything trackable and accountable and a potential buyer will see the business can run under them as well as it can run under you.
  4. Reputation – Many buyers doing due-diligence will contact customers or suppliers, look for online reviews, contact the BBB or look for other apparent service or reputation issues. While all 5-star reviews is not necessary, service or product issues apparent to a potential buyer will lower the value of the business and the price they are willing to pay.
  5. Brand – This is tied to reputation, but not exactly the same. Brand is contained in so many areas of a business, not just a sign or letterhead or logo. Brand is what the company represents to the public and is expressed in many things. Having a clean logo and up-to-date website are helpful, but bad service, a messy building and dirty vehicles are as much a smirch on your brand as an out of date website.
  6. Clean out the cobwebs – My wife, an author, has always said, “Only a slob leaves it to the editor.Even if you are selling to your kids, you owe it to the buyer to pass along the best business you can. Go through your business from front to back, side to side and top to bottom and create a list of things to clean, repair and update. You may not get to all of them, or even want to, but anything you take care of is one less thing a buyer will use to knock down your asking price.
  7. The right buyer – Knowing who the most likely buyer would be for your business will help you maximize your salability and sales price. If your industry is rife with acquisitions, strategize to make your company the most desirable acquisition on the market…or off the market. My business wasn’t for sale, but a buyer came for it anyway. I had created something of real value and the buyer didn’t wait for a For Sale sign. And even if no one approaches you prior to you listing it, owning a well run company until you sell is a good place to be (the new owner of my former company had two offers to purchase it immediately after he bought from me).

The “Clean Car” Syndrome

Yes, it is true that once you go through your business and take care of all of these things, it may be like detailing your car prior to selling it. You could end up saying, “Wow, I kinda like this car. I’m not sure I want to sell it anymore.” But, recognize that attitude and confidence will put you in the driver’s seat when it comes to negotiating and will make you money!

If you know your business is worth what you are asking for it, you will be able to walk away from a buyer who is simply testing your resolve and trying to lower your price. Your power in negotiating is your willingness to walk from a deal. If you come across as desperate or needy you will get less for your business or possibly even scare off a solid potential buyer.

Put a plan in place, set a timeline for achieving your improvements and then set a date to list your business. I guarantee success. Your company will be in a better position, your buyer will be happier and you will make more money, guaranteed!

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