Baby Boomers are retiring and they're putting their businesses up for sale. While this trend will eventually slow, we expect this to create an active market for small businesses for quite some time--likely the next 5 years. In addition, many other boomers who have had corporate careers are looking to purchase a business as the last step prior to retirement, so the buyer’s market is strong as well.
Other reasons that business owners wish to sell are due to relocation, owners who purchase a business to turn it around and “flip” it, or the original plan was to turn over the business to the kids – who don’t want it. Sometimes a business owner will wish to exit sooner than planned, as the business is either more work/time than anticipated or they were undercapitalized. Particularly for small businesses where the owner had unrealistic expectation of being ‘absentee’, there will be the day the manager quits, an employee doesn’t show up, and you are the one scooping the ice cream.
According to the International Business Brokers Association, most business owners tend to do no - or minimal - exit planning. This is a huge issue for many business owners, who may be looking for the business to provide retirement income or income to pursue new interests. Therefore, in order to maximize the value of a business, it is critical for a business owner to take the following steps prior to putting your business up for sale. When you are then ready to sell, a professional business broker can be your best ally to help you get the most value out of your business when you sell.
A business owner who is serious about succession planning needs to follow 10 steps in order to exit the business successfully. Today we will review the first five, and the next blog post will review the remaining five steps to take to be sure you get a fair price for your business when it is time to sell.
1. Commit to Selling in the Future
Any business can be sold, but if the seller is desperate to get out, the result will be that the business sells for a much lower price. The key is to start planning your exit strategy when you enter the business. Know where you are planning to go and WHEN. It is also important to understand the reasons why you want to sell and be able to articulate them. Commit to activities that make the business more marketable and at the best possible price for a future buyer, and realize that this can be a multi-year process, especially if you are looking to the business to provide you with retirement income
2. Maintain Good Financial Records
Even though a buyer is not only buying a business solely for the “numbers,” knowing how the business operates financially is key in determining a sales price. It is critical to keep records and copies of your tax returns, profit and loss statements, balance sheets, asset lists, and inventory tracking—and be sure you understand your financial position yourself.
Understand your business and be able to explain critical numbers – both income and expenses. If you are reliant on progress payments, be sure that you have a tracking system so that a purchaser could collect on “in-process” projects.
Have a handle on discretionary expenses that are run through the business – it is OK to run certain expenses through the business, just know what they are and be able to show which expenses are discretionary versus business.
3. Document Policies and Procedures
Your internal systems are key to your success and how you make money. A buyer will want to know HOW you run your business so that they can build on your success.
Document policies, operating procedures, key formulas, passwords, and anything else that is critical to running the business. All policies, procedures and business plans should be “living” documents, which are regularly reviewed, updated, and referenced by all staff.
4. Make the Owner Less Central to Day-to-Day Operations
Develop a strong management team and delegate, train, and empower key staff to be able to run the business in your absence. If you are the one and only person who can run the business, how can anyone else ever have a chance?It is important to show that someone else can easily take over your role in the business during an absence. Take a vacation and see if your management can run the business with minimal reliance on you while you are gone. Customers and vendors should have relationships with multiple people at your company, so that if you were to sell, your client base would be comfortable with the change
5. Strive for Quality Sales
You must understand the specifics of sales trends in your business, so be sure that you are able to articulate how sales are incurred based on the following issues:
· Seller Concentration – Is your company dependent on one or two clients for a majority of your revenues? If any of these key clients were to leave the business, how could you mitigate this risk?
· Recurring vs. One-Time Revenue – Is the business developing recurring revenue or are you more reliant on one-time purchases? How do you ensure that you have clients that will ensure an ongoing income stream in the future? Do you rely on ongoing contracts for revenue? If so, are there “out” clauses that could hurt a prospective purchaser?
· Products and Services - What is your product/service mix, and what is the profitability of each of your product/service lines? Can this be clearly articulated to prospective purchasers?
(Part 2 will outline the other five things - stay tuned!)