According to the recent BizBuySell Insight Report, most small business owners are confident in receiving an acceptable offer if they were to sell. How about you? If you sell your business in the next year, will you receive an acceptable offer or not? If not, you have some work to do. Here are five suggestions:
Have a Realistic Price in Mind
The number one reason a business doesn’t sell is because the owner places an un-realistically high value on her business.
Think of it like you’re selling a house. You have wonderful memories created in the house. It’s served you and your family very well. You’ve taken care of it, and it’s protected you. You love the house and value it tremendously.
A potential buyer doesn’t have memories of the house, isn’t connected to it, and sees the benefits and flaws. As a result, you place a high value on the house while the buyer discounts your asking price by all the flaws she sees and how much it will take to fix it up to her standards. You and the potential buyer may be far apart on the value of the house and therefore the price.
A wise person once told me when it comes to selling your house, you think of it like a castle and the buyer thinks of it like a hovel.
When you put a price on your small business, be realistic. The best way to be realistic is to get a formal valuation from an independent valuation expert. Someone with the ABV or CVA credentials.
Make Sure Your Financial Books Are in Order
This point was driven home by two recent small businesses I’ve helped guide because the owners wanted to sell soon. In both cases, the financial information on the businesses was poor.
Most potential buyers will ask for three years of historical financial statements: P&L and balance sheets. From these documents, a potential buyer will determine how your business will work under her new management. If you can’t provide the information in the standard accounting format, or if the information is incomplete, the potential buyer will likely walk away.
For the two clients I mentioned above, I asked them to work with their bookkeeper and accountant to clean up their financial statements before they try to find a buyer. In one case, the business owner went back three years and in the other case, the business owner is adjusting only this year’s numbers.
The bottom line: if you want an acceptable purchase price, make sure your financial house is in order.
Ensure Your Business Is in an Uptick
The best time to sell your business is when the revenue and profit lines are swinging upwards. I call this the up and to the right syndrome.
Make sure your business results tell a good story to potential buyers. To make it a good story, you need growth for the last two or three years. Growing financial performance reassures buyers the business is well-managed and has the potential for continued success.
Buyers are often willing to pay a premium for businesses that have a proven track record of increasing revenue and profitability because it indicates future earning potential. Buyers who need financing to purchase the business will find it easier to secure loans if the business has shown steady growth. Finally, buyers are often looking for businesses they can scale further, and steady growth indicates that the market demand and internal processes are already favorable for expansion.
If the story your business growth shows is positive, you’re likely to get an acceptable offer. If your story is less than stellar from a financial perspective, you may want to delay offering it for sale until the story improves, that is, your growth trend improves.
Be Flexible (and Creative) in the Terms of Your Deal
My mentor and coach Chris Flett reminded me, “The price is the price; it’s the terms that matter more.”
After you and a buyer agree on a price based on an independent valuation, the real fun begins as you negotiate terms. For example, will the buyer pay in full at closing, or will there be installment payments? Are there any seller-financed options, and if so, at what interest rate?
Is it an asset sale or stock sale? There are tax implications for both the buyer and you as the seller depending on which approach is used. (I wrote about this in an earlier SixtyandMe post). Who will assume the business’s existing debts and liabilities? Buyers may ask for a non-compete agreement to ensure you won’t start a competing business after the sale. What transition support will you provide, such as training the new owner or introducing them to customers and vendors? And so on.
The point is, there are numerous terms of a sale that are just as (or more) important than the price. Make sure you stay flexible and negotiate your interests and not your positions. I suggest you read the book Getting to Yes by Fisher and Ury to prepare for a negotiation.
Have a Plan
Selling a business is complex with many twists and turns. You can’t anticipate all the events, but having a plan helps ensure you stay on track when the inevitable unexpected incident happens.
There are five steps to selling a business:
- Set goals
- Audit the business
- Improve the business
- Market the business
- Sell the business.
Start out with these as the main points and then add the who, what, why, how, and when for each of these steps. For example, who do you want to have involved in the goal setting process? What are your goals in terms of ideal buyer? When do you want the sale to be completed? What do you want to be doing after you exit the business? How will you go about the process of goal setting?
Finally, assuming it takes at least 12-24 months to complete the sale of your business, so when will you create your goals? Set a deadline and get started. After you complete the first step in the process, move on to creating specific action items for auditing your business.
If you want to receive an acceptable offer for your business, start with creating a business sale plan. If you need help with this, ask your CPA, a trusted business consultant or business exit expert for assistance.
Summary – Be Prepared!
Selling your business is one of the biggest decisions you’ll make, so why leave anything to chance? By pricing realistically, keeping your financials in top shape, selling when you’re on an upswing, staying flexible, and having a solid plan, you’ll attract the right buyer and boost your chances of closing a great deal. It’s all about being prepared, smart, and strategic. So, what’s your next move? If you’re ready to make things happen, start today – because a well-prepared seller always has the upper hand.
Let’s Have a Conversation:
Do you know the current value of your small business? Did you come by this number on your own? What do you think about these tips for selling your small business? Do any of them resonate with your current situation, or do you have questions about getting your business ready for sale? I’d love to hear your thoughts! Feel free to share your comments or submit any questions you have. I’m here to help.
