What should you, as an entrepreneur or business owner, do to realize the most money when selling your business? Here are 5 action items to get started on today in order ensure you get the most out of any sale of a business.
1. Prepare for a Sale
Is your company in shape to be sold? For too many companies, the answer is no. For such companies, it’s time to clean up the company and begin to operate like a company rather than a personal fiefdom.
- Get the books audited (buyers rarely trust unaudited statements).
- Clean up legal issues, especially ensuring that you have title to the shares of the business and all assets (including patents and copyrights). To do this, bring in a good lawyer to assess the legal state of the business and all the contracts. Further, if you have an outstanding legal issue, get that resolved and done with.
- Make sure that your tax structure is correct, so you can retain as much of the sales price as possible.
- Get all the owners on the same page and in agreement about the plan.
- Get all the processes and all the facilities in shape. Make sure the business and the operations look spic and span. Would you buy a beautiful house if the front door knob came off in your hand? The impressions of your business matters to prospective buyers — a lot.
2. Develop Relationships with Potential Buyers
Reach out and network with larger players in your industry, as well as potential business brokers or private equity players. What interests them about your business? What do they value most highly, and why? At this stage, your business is not officially for sale, so you’re on more equal footing with them and will better be able to pick their brains and learn what you can do to drive value in your business. Further, these will be the people you can reach out to directly when you decide to sell the business.
3. Build Value in Your Business
The vast majority of buyers will care about one thing — EBITDA (earnings before interest, taxes, depreciation and amortization). It’s the earning capacity of the business that determines how much of the debt (which the buyer will take on to fund the acquisition) can be paid off yearly. Most buyer valuations start out with some multiple of EBITDA. So, to increase your sale price, you must first build your EBITDA. Growth in revenue is good only if that means growth in EBITDA.
Second, get yourself out of the business. If you’re still running the business as a one-man (or one-woman) show, then you’re not creating sustainable value for your business. Nearly all buyers hate to be dependent on any one person (you) after they’ve bought a business. So, start to delegate and build successors.
The final point is to continue to do business ethically. Good buyers are going to perform extensive examination and assessment of your business (due diligence), and they’ll find out how you run your business and how you treat your customers. Thus, continue to have good, solid customer relations, and continue to have a good reputation in the marketplace.
4. Consider the Timing of Any Deal
Most businesses are sold at multiples of EBITDA. But, the multiples that companies are sold at change depending upon the economy and how “in” or “sexy” a business is. So, think about when you are going to put the business up for sale. You’ll need to think ahead since the sales process will take six to 12 months (at best). Realize that potential buyers will walk away from a deal at the last moment if your business begins to deteriorate during the sale process. A general rule of thumb is to sell moderately early in a growth upswing for your business. That way, you’ll have time to show EBITDA growth, and that growth will be more likely to keep going for another year or so. Deciding to sell too late or at too high of a price will inevitably lead to “no deal.” Remember: “Pigs get fat, but hogs get slaughtered.”
5. Get the Deal Closed
Before you put yourself up for sale, have everything ready. You must be aware that the “kimono will be fully open.” In the due diligence process, the buyer will want to know everything, so be ready with accurate details and supply them when asked.
Back to point number one: Make sure you don’t have any hidden time bombs that will crash the deal. Two further points to consider. First, negotiate from a term sheet or formal letter of intent that spells out and addresses all the potential issues (payment holdbacks, indemnification, limitations of liabilities, caps and baskets, etc.). If you don’t know about all this, then it’s time to speak with an experienced deal attorney (note: your local attorney who may have only done one or two small deals is the wrong person).
Second, move fast and respond promptly. The longer the deal takes, the more the power shifts to the buyer. Nearly all sellers will go down a slippery mental slope and develop a condition known as the “psychological pre-sale.” As the seller, you’ll begin to dream of the money and life after the sale, and you’re likely to become committed to completing the deal even if it no longer meets your original objectives.
For most entrepreneurs and owners, selling your business is the biggest financial decision they’ll ever make. As such, it takes careful planning and consideration and the advice of others (especially a respected M&A lawyer and a tax expert) to ensure that they get the most money in their pocket when they sell.
David Shedd has 10 years of success as president of a $200 million group of manufacturing and services companies, having overseen 19 different B2B businesses. Shedd is principal of Winning B2B Leadership, an advisory firm focused on small- to middle-market B2B clients, while looking for his next company or group of companies to lead. David blogs at www.helpingleaderswin.com and his book, Build a Better B2B Business: Winning Leadership for Your Business-to-Business Company, is now available on Amazon.com.
Originally published: Feb 3, 2012