As a small business owner, selling your business is a once-in-a-lifetime event. To get the most amount of profit, you need to plan ahead. Unlike selling a real estate or a boat, you need to start the selling process much sooner. Buyers are interested in the past three or four years of financial records and performance of any small business that they want to acquire. For this reason you want to start a mid-term project to sell your business. Few important matters you have to consider when preparing your business ready for sale.
1. Seller's discretionary earnings: How much money are you taking from the business as travel expenditures, entertainment or compensation? Yes, it will save you from income tax, but potential buyers find it difficult to separate what is a necessary expense and what is excess. If you are not careful with this, net income of your business will be lower and the buyer won’t pay a high price for your business.
Related: SDE as Basis for Business Valuation
2. If possible, take advantage of equity distributions: If your business is an LLC or S corporation, take advantage of equity distributions. Equity distributions are taken out from after-tax profits and because of this reason profits will be higher and buyers will see extra value in your business. After-tax net incomes are only subject to personal income tax and not employment tax, this will also boost profits.
3. Cautiously evaluate capital investments and ensure you still own your business to receive profit from the investments. For example, depreciation expense is added back to calculate EBITDA whereas lease expenses are not. One will cost you money upfront while the other will spread the outflows over time and come out of future expenses. Rethink hiring salesman and staff to develop new business lines or to market new products as this move will add expenses for years to come.
4. Make your business run without you: Buyers don’t feel confident about any small business that is heavily dependent on the owner, fear is when you are gone; the business will be gone too. Make the buyers confident about your business by establishing a management to run the business. A business operated by a strong management assures the buyers that it will run in the same way after you are gone. It is imperative to make sure your business is successful without you and any buyer can easily step into your role as a redundant owner.
5. Written Contracts to reduce risk: To put your business on a firm footing and make your business alluring to potential buyers. Convert any verbal agreements with employees, customers and suppliers in writing agreements. For instance, ask your employees to sign confidentiality agreements to protect the unique characteristic of your product and prepare an employee handbook. Reduce staff compensation claims by adding your employees in a safety program. Document your product usage terms and product warranty policies. Request a major supplier to commit in a written agreement. Convince main customers to sign permanent purchase contracts. Left nothing to chance and double check all the existing written contacts with customers and suppliers to ensure no contact will require any renegotiation or expire during the negotiation process to make things complicated. Arrange everything at least six months before you decide to sell your business.
6. Get your books in order: Quality buyers want clean financial records, they will ask for tax returns, financial statements, purchase documents and any other financial statement. Hire an accountant to evaluate your financial records according to GAAP (generally accepted accounting principles) and bring credibility to your business with a formal audit. Do internal due diligence before putting your business up for sale. Calculate revenue growth and realistic projections of profitability. A detailed and credible financial record will yield you a higher price for your business.
7. Inventory and Working Capital management: Don’t lower your profit by investing in excess inventory and keeping surplus working capital in the business. You only need sufficient inventory to run the business for a period of time and the buyers don’t expect anything else.
8. Bring depth and diversity in your business: Make sure you are not depending too much on a single client for a profit. One supplier shouldn't be your main source for raw materials. Don’t depend on any employee to manage the majority of your business related work. Potential buyers will value depth and diversity in your small business.
9. Do some tax planning
Video: Pino Bacinello, a business broker, explains how tax planning can yield big dividends when selling your business.
10. Document all relevant information: You are a small business owner, but don’t run your business in an unprofessional way. Document all the business related information. Quality buyers want to see your sales volumes, customer list, suppliers, inventory levels, human resource records, governance, procedures and systems for every aspect of your thriving business. Gather this vast collection of information and present it to your potential buyers to attract a premium offer.
11. Discuss the future growth plan with your buyers: May be some investment is needed to grow your business even further, but you can’t invest at this moment. Discuss your growth idea with potential buyers, you are running a successful business for a long time and they will give importance to your thoughts and most probably invest in the future growth according to your vision.
12. Make sure you have a proper risk management plan on place.
13. And last but not least: Keep your heart in. Keep your heart and soul in the company and run the business as if you don’t have any plan to sell it. If you have an attitude that your enterprise is a lost cause and you just want to jump ship, it will reflect in your business and buyers will be discouraged.
Fix any issue related to lack of information, inconsistencies, and problems in the previous years that could delay your sale plan and lower the sale price. Potential buyers are eager to know if they will be able to recover their investment within a few years. Demonstrate the growth potential of your business to the buyers through scalability, such as vertical, horizontal, geographical, cultural and attract buyers.