You have decided to sell your business several years from now as part of your retirement.
This allows you to make some changes so can maximize the price.
A purchaser buys a business that has to operate independently of the former owner. If all the procedures, control mechanisms and valuable information is only in the mind of the owner, there is nothing to sell. The business may be a very good business, but if it is not a system, it cannot be sold, or sold for a good price. So, if information and systems are not in place, now is the time to work on that.
Here are some of the items a business owner might consider in the pre-sale improvement plan
- Is there up to date, relevant financial information that shows your profitability, your ability to grow the business and your ability to withstand a downturn?
- What is the nature of your business revenue? Is most of the revenue stable and recurring or does revenue consist of one-shot sales where you constantly have to get new customers? If the revenue is not recurring, would you have time to change the business model so that you can add recurring products or services to your existing customers? Are the products and services distinct where there are switching costs for your customers to go to another supplier?
- What is the trend of sales? Has it been increasing? If not, what is the story?
- Are profit margins increasing? If revenue is going down, but margins and profits are increasing that may be a good sign, but is the revenue decline temporary?
- Are there job descriptions? This is especially important for the owner. Remember that a purchaser is buying a system and the previous owner’s function will have to be performed by someone else.
- Does your company have good systems and procedures? If all the systems and procedures reside with you as the business owner, then the business may not be worth that much without you. If the business owner cannot go away on vacation because it cannot manage without him, then it cannot manage.
- Is the corporate structure right? For example, does the company have to be sold as one or are there parts that can be sold separately? If so, are they in separate legal entities? A prime example is real estate, which generally should be held in a separate legal entity.
- Do you know the impact on the business if a key customer or a key supplier decided no longer to do business? Are there long-term agreements and/or back-up plans in place?
- Is there a back-up recovery plan if there is a fire, or if your computers and/or data was lost, stolen or compromised?
This is always important, but may be especially important to family owned enterprises that will be sold to an external party or to family owned enterprises that are transferred to just one member. In a family business, there may be an ownership structure that varies quite significantly from the operation of the business, with ownership among many family members who are not active in the business. Some of the considerations are as follows:
- Is there clear ownership of assets? This is particularly important for intellectual property.
- Are there any minority shareholders and are there clear shareholder agreements that empower majority shareholders to force a sale
- Are there long-term, transferable contracts or leases (and conversely, if there are contracts a buyer does not want, are these short-term?)
- Are there other licence, agreement, zoning, permit issues?
There will always be some weaknesses to any business. However, clearly identifying strengths and weaknesses early on will allow the owner to develop a ‘story’ which can facilitate the sale of the business.
Once the pre-sale improvement assessment is done, you will have to review your options:
- What are the strengths of the business and what can be done to ensure they remain strengths and possibly become even stronger?
- Of the weaknesses, there are three alternatives: Some weaknesses cannot be changed as they are in the nature of the industry you are in, your location or the macro-economic environment. There are other weaknesses that can be turned into a strength, but doing so will be more costly than the price concession you will have to give up on any sale, so you should do nothing. Then there are weaknesses that you could and should try to turn into strengths before you sell your business.
Many have said that selling a business is a marathon not a sprint and if you have the time and can sell at a time you don’t absolutely have to, you will obtain a better price.