It is estimated that only 25% of small businesses currently on the market will ever sell. That’s not a very encouraging number to see, but it is the reality of our market. As business brokers, we will do everything we can do on our part to get your business sold, but we do need your help first. Before we take your business to market, there are 3 important things that a business owner can do to put their business in the very best position to sell. If you want to be among the lucky 25% of listings who do sell, then checking these items off of your list will give you the best chance of getting there.
1. Keep Your Financials Clean
When it comes time for a business to sell, having good financial records is one of the most important aspects that will not only bring a higher purchase price, but it will make the business more attractive to prospective buyers. If you are preparing to sell your business, or even thinking about selling it in the next few years, there is one big thing you can do now, which could help you increase your selling price and the ability to eventually sell your business: show more profit on your tax returns and clean up your books.
Ideally, you want to want to minimize your non-business expenses or personal expenses on your tax return for the 3 years prior to listing it for sale, but 1-2 years of cleaner books is better than nothing. As with most small businesses, there are many personal expenses accounted for in the financials. Because this is so common, your business broker will perform a financial recast to add back in those provable personal expenses. Some of those add-backs are automatic, like depreciation, amortization, and interest, but a buyer will question excessive add-backs of personal expenses, so the least amount as possible in a business’s tax returns the better. Also, unreported cash income can scare buyers, since it’s often not provable, so you might want to start accounting for all of your income, including cash, leading up to the sale of your business, because no buyer is going “take your word for it.” For any questions regarding your financials or Tax Returns, always consult with your CPA for professional advice.
It’s no secret that small business owners aim to maximize expenses on their tax returns, in order to show the least amount of profit possible. While that is a common practice to minimize tax liability, it can also negatively affect your business’s chances of qualifying for an SBA loan, and ultimately could hinder your chances of selling your business. It will definitely make the due diligence process more complicated as well. The cleaner and more solid your financials are, the better. It will increase the chance your business has of qualifying for an SBA loan, and the due diligence process will be much easier for you and the buyer, because everything will be transparent and easily provable.
2. Price it Right
Historically, the number one reason that a business doesn’t sell is because the asking price is too high. Buyers are paying more for quality businesses than ever before, but they are still looking for a deal that makes financial sense. If they can’t see the value in your asking price at first glance, they will keep scrolling and never click on your listing to request more information. Buyers in the marketplace are comparing every listing in their price range, regardless of industry, and they are looking at one key ratio: asking price to owner benefit. This is why it’s so important to get the asking price right from the very beginning, so that we can generate as much buyer interest as possible.
Today’s buyer is going to be very discerning about where they invest their hard-earned money, and the owner benefit of the business they are considering has to relate to the asking price in a realistic way. Overpriced businesses rarely get a second look, and they often become “stale” if they are sitting on the market for too long.
The general buyer perception is that most business listings are overpriced, so we have to make sure that prospective buyers can see value in your listing immediately. Small businesses should be priced based on an industry multiple that is derived from sold comparable businesses with a similar owner benefit. If we can easily show that, then buyers will be more likely to see the value in the asking price. With such a huge buyer pool out there shopping, we want to get as many eyes on your listing as possible and getting the price right is the number one way to do that.
3. Remove Yourself from Operations
Companies where the owner is the entire business, or the business operations can’t run without the owner are very tough to sell. We see those businesses sit and sit on the market, waiting for a buyer who has the exact interest and skill set of the current owner. It’s not impossible to find, but it can be difficult. So, that’s why it’s important for business owners who are thinking about selling in the next few years to prepare in advance. Gradually start to pull yourself out of the daily operation of the business. Train or hire key employees to fill your role, so that you are simply in a position where you are managing the business. Working ON the business and not IN the business is what your goal should be. If the business looks like it is dependent on you, a buyer may believe the potential for its growth will go away when you do. Therefore, take time to ensure it can run without you as its face.
Buyers look for businesses that come with highly trained employees, and more often than not, buyers would prefer to purchase a business that has a manager or key employee already in place, who can successfully run the business’ daily operations. This leads to a smoother transition between ownership, and it ensures consistency for the other employees, as well as the customers. Businesses that have a manager and a specific employee structure in place are much more attractive to buyers, and it also opens up more investor-type buyers who are looking for a business that can be run by an absentee owner. Outline each and every responsibility of all employees and include key performance indicators that clearly establish what is expected of each role. Documenting all processes and procedures, and making sure employees are well-trained will be key.