No matter how you structure a sale of your business, you will almost certainly get a better sale price if you take steps now to increase its value.
My friend Eric Williams, who is a business broker and consultant with Codiligent, LLC has several suggestions for businesses looking to boost value in the time leading up to sale.
1. Increase cash flow
Can you raise prices or eliminate expenses? For many small business owners, reducing their tax burden is second nature. But low taxable income creates a perception of low value for a buyer. In addition, eliminate owner personal expenses that are paid through the business, such as car allowances, club memberships, and the like.
2. Decrease risk perceptions
Implement a reporting system that gives you key information about company performance. Manage accounts receivable and implement credit and payment standards. Keep outstanding loans and financing needs to a minimum. Control growth at a rate that the company can finance internally and replace short-term credit with long-term, fixed-rate loans.
3. Highlight opportunities for growth and efficiency
Every buyer wants the chance to exploit undeveloped potential. Maximize the value of your business by highlighting untapped markets, new services, or technological advances that will take your business to the next level.
4. Use a professional
To ensure the greatest likelihood of a sale for your asking price, work with a qualified professional business broker to ensure that your company listing is presented in the best possible light to the widest possible audience of prospective buyers.
The most popular exit strategy for small businesses
If family succession planning isn’t viable, and there is no company insider who is willing and able, then an arm’s length sale on the open market may be an option. This is the most popular exit strategy for small businesses. The business owner lists the business for sale and – we hope – ends up with a healthy sales price.
Groom your business for the sale
If you are targeting investors looking for an attractive opportunity, spend some time grooming your business for sale to make it as attractive as possible. A great potential buyer is another business in your industry that is looking for a strategic acquisition to simultaneously expand into a new market while eliminating a competitor.
The key is to target your potential acquirer(s) in advance and position your company accordingly. And of course, convincing your acquirer that your business is worth what you want for it.
Get a professional business valuation before naming your price
There are numerous business valuation formulas ranging from asset-based to future earnings approaches. But no single method can be used in isolation because market trends, economic conditions, and comparable sales also influence what buyers are willing to pay. If you have the resources, hire a professional business appraiser to do a valuation before you set the price. A professional business valuation will increase credibility and may save you legal hassles later on.
Listing your business for sale
After determining the price, an owner can list the business for sale on various business sale websites. Some sites permit sellers to list their businesses directly (think “FSBO” for a house), while others limit access to business brokers. Typically the sites charge a listing fee, but some, such as GlobalBX, are free. Business broker and consultant Eric Williams of Codiligent, LLC recommends that sellers not limit themselves to a single website when listing. Williams notes that many buyers are cognizant of some business sale sites but not others, so to get maximum exposure he recommends that owners list their business on as many as possible.
Sales of a business come in all different flavors. We’ll spend some time over the next several posts going through some common options for selling a business. Today we’ll look at the “insider” sale, which is not to be confused with the less desirable transaction of “insider trading.”
An insider sale involves transferring ownership to an existing employee or co-owner. Although some insider sales may involve a lump sum cash transaction, often the buyout occurs over time, typically funded in part from ongoing earnings of the business.
Depending on how the insider sale is structured, the seller may gradually transfer his or her ownership during the payout period, or the seller may transfer ownership in one fell swoop but retain a security interest, such as the right to reclaim the ownership stake if the buyer doesn’t perform its obligations (lawyer-speak for “doesn’t pay on time”).
One benefit of an insider sale is a greater likelihood of ongoing success than with an “outsider” sale, because an insider usually has greater familiarity with company operations and personnel. In addition, an insider sale may allay concerns from other employees, as well as the company’s suppliers, customers and lenders, about ongoing leadership and management. This in turn may increase the likelihood of getting a deal done, obtaining a fair price, and the ongoing success of the business, which is critical if the selling owner is getting paid over a period of time.
Downsides may include resentment from other employees who find themselves working for a former co-worker, or the realization that the new owner lacks skills or experience to fill the previous owner’s shoes. Also, new owners may want to invest more profits into developing new product lines or customer bases, which may reduce short-term profits, thus limiting the availability of funds to pay the selling owner. In addition, a sale to an insider may result in a lower price than a sale to an outsider.