Preparing for Sale: Assessing the Need for Short Term Changes

You may consider this Guide optional. As you’ve decided to go ahead with the sale without making any changes to the business.

And that’s perfectly OK.

However, here are a few arguments in favor of reviewing this content anyway, whether you’re considering short term changes, or not:

  1. You may discover a few easy, low cost ways to justify an increase in your asking price (perhaps giving a significant payback on the extra cost and effort)
  2. It’ll help you to prepare for dealing with prospective buyers - by encouraging you to dig a little deeper under the surface (this is what you can expect a serious buyer to do!)
  3. Getting your business in the best possible shape by sale time, and turn it truly sellable.

The How-to Guide covers the following aspects:

  1. Explaining the methodology
  2. Assessing realistic short term changes
  3. Implementing the changes

Looking firstly at the methodology:

1. Explaining the methodology

It’s recommended that you refer to two other How-to Guides namely, Review Your Business Externally and Internally, Prepare the Sale Memorandum and How Attractive is Your Business to Buyers?

Once again, it really helps to think as a buyer would. To appreciate what they expect from your business.

A buyer’s chief concern will be the performance of the business in the first and second years following the purchase, when their investment is most at risk. However they’ll also have an eye on longer term potential once they’ve consolidated their investment. To increase personal income, business profitability and realize an increase in capital value. Serious prospects are bound to probe you on the detail.

It therefore behooves you to present the business in a healthy state. Focus on the positive aspects of your business, without deliberately misleading or burying bad news that's sure to surface in the near term.

ExitAdviser has developed a simple framework to highlight potential change actions. It’s not a textbook approach, just something practical that you can use to get the job done in a time-efficient way.

It’s about either selling more (the volume approach), or using your assets more efficiently and effectively (the productivity approach).

It balances three important factors:

  • Revenue
  • Cost
  • Risk

Minimizing risk will always be an important consideration for the buyer, because there’s always a significant unknown element in any deal.

Making changes in business before sale

Any changes you make now must demonstrably improve short term performance. Performance gains can be communicated anecdotally, but it's far more powerful when they're presented in official financial statements and reports. A buyer will want to closely examine these financial statements.

Related: How to Increase Profitability Before Selling Your Business

Some change measures impact finances in the short term, others take longer to work through into the numbers. Let’s look more closely at the options.

1. Volume strategies - given your circumstances this is mainly about competing better for short term profitable sales, which means either persuading existing customers to increase their usage rate of your product or service, or tempting customers to switch to you from your competitors (or a combination of the two approaches).

In such a short timescale it’s conceivable that you could make minor product or service adaptations, thereby extending sales opportunities to a new group of buyers. However this "innovation" category of volume changes, which includes developing new products and services, or entering new geographic markets, takes much longer to implement, and is also much riskier.

2. The productivity strategy has two broad approaches:

  • Higher gross margins (the difference between selling price and the variable cost of providing each unit) - the total money contribution received from the range of products or services sold, achieved either by increasing prices, or improving your mix of sales in favor of more profitable lines
  • Cutting costs (thereby improving profitability) - whether reductions in variable costs or fixed costs (which are the business overheads you have to pay irrespective of the volume sold)

The above generic strategies can be summarized in the following practical list of potential options:

  1. Increase customer usage rate
  2. Optimize prices
  3. Improve sales mix
  4. Cut variable costs
  5. Cut fixed costs
  6. Reduce the uncertainties under your immediate control (regarding labor, customers, suppliers, partners, operations, accounting practices etc.)

When you’ve exhausted these options you may also look at slightly riskier alternatives:

  1. Win customers from competitors
  2. Adapt existing products or services

Now lets look at these eight strategy options in the context of your existing business model. The Business Model Canvas was first introduced in the How-to Guide, Review your business externally and internally, prepare the Sale Memorandum.

Although the business model doesn’t factor in risk or the competition, it does provide a handy checklist of the key structural building blocks in your business.

There are nine elements, with your Value Proposition at the center:

  1. Value Proposition – to satisfy customer needs
  2. Customer Segments - the ones you choose to service
  3. Channels - used to access your customer segments
  4. Customer Relationships – how you conduct these in practice
  5. Revenue Streams – that flow into the business
  6. Key Resources - that you use within the business
  7. Key Activities - that are undertaken to deliver customer value
  8. Key Partnerships - that further leverage your capability
  9. Cost Structure - of the business that impacts overall profitability

Related: Strategic plan template to formalize your plan

Using this framework the next section presents a number of options for short term change.

2. Assessing realistic short term changes

A few opening comments before going into the detail:

  • If you’re looking to sell your business in 6-9 months, there’s little time to implement major changes (and, anyway, rushing something through is likely to prove counter-productive)
  • Look for changes that give you the biggest "bang for your buck" in the short term (that is, a definite ’benefit versus cost’ business case justification)
  • It’s important to conduct this analysis in conjunction with the Business Valuation Tool to forecast the impact on asking price
  • Keep in mind that improved future cash flow is the basis for business valuation, and so it represents the ultimate goal for any changes (the present value of future cash flow is driven by revenues, expenses and risk).
  • More fundamentally, avoid any changes that put existing cash flows at substantial risk, thereby threatening the entire business.
  • Endeavour to ensure that any change is consistent with the existing culture of the business, so others perceive it as "business as usual" - this prevents suspicion as to your real intentions, which, if known, may create uncertainty among your staff.
  • Meaningful changes will have a knock-on effect on other parts of the business, beyond immediate financial considerations - it's therefore important to think through the implications of any change, particularly where it has an impact on staff .

Let’s concentrate on short term benefits. You’re encouraged to use the framework in Section 1 to think of your own measures. Here are a few possibilities:

  • More or different promotional activity – to attract new customers of the right profile, which can increase both short and long term cash flow and profit performance – if your aim is to take sales from competitors, make sure to have a compelling reason for them to switch to you, perhaps an additional benefit or temporary price discount incentive - it’s important to factor into your cost/benefit analysis the promotional costs, and the overall impact of a price discount
  • Volume discounts - to encourage existing customers to buy more of your product or service – estimate how many extra sales you'll need to first breakeven, and then add to your profits - the risk of this strategy is that sales are merely brought forward, to the detriment of future performance
  • Partner with a supplier of complementary products or services – this can be a relatively quick, easy and low risk way of extending your product range by providing new items valued by your customers – calculate the margin you'll need to make on the supply deal to meet your minimum profit target, taking into account all additional costs and any conditions attached to the deal
  • Stop supplying unprofitable customers – it’s always important to analyze which customers (or customer segments) make you the most money – focus on removing the ones making little or no profit, perhaps by increasing prices significantly - this may reduce revenues in the short term but, other things being equal, will increase your profitability, and allow you to re-deploy resources to more profitable customers
  • Adjust product or service mix – you may drop some lines, or optimize the prices of others, thereby improving the overall profitability of your sales mix
  • Negotiate better input prices – particularly of key supplies, by shopping around alternative suppliers for a better deal, without compromising on quality – this can reduce variable costs, or overhead, or both
  • Optimize business activities – if you look carefully there are always more efficient and effective ways of undertaking activities within your business (to give more outputs with the same, or less, inputs) – often this is found at the point where activities link or overlap – be careful to assess potential consequences for your value proposition and customer promise before making a change
  • Outsourcing activities – subcontract non-core activities to external suppliers – some employed staff may actually prefer to go self-employed and come back on a part-time basis – however be careful to assess the risk too, for example the potential impact on staff morale at this sensitive time

There will be changes that don't make sense to implement in the time available, for example developing a new product or service from scratch.

Unrealized opportunities such as these will have less value to buyers than the "here and now" realities of the business. However an updated business plan including an objective assessment of future business potential will probably be of interest to them, particularly where it’s backed with evidence from research.

At the very least it makes you look more professional in their eyes. This may favourably impact their perception of business value and what constitutes a reasonable asking price.

Successful implementation of one or more of the above change measures (or ones that you've come up with yourself) should give you added confidence, and may lead you to re-visit previous inputs to the Business Valuation Tool. Perhaps there's now justification for an increase in the asking price.

There are three other obvious considerations to add from the financial arena. They are listed separately so they don’t get overlooked in your checklist. It’s a big plus if you’ve already got these in hand.

  • Make sure the business is solvent - if you go bust you’ve no business to sell!
  • Make sure you present your finances clearly and professionally.
  • Make sure you’ve realistic projections for sales and profits over the next 2-3 years.
  • Make sure you have a proper risk management plan on place.

Maintaining sufficient liquidity to meet current liabilities is essential. Paying your staff promptly is a priority if you're to retain their services and motivation.

With a purely cash based business, the situation’s clearer. Where you offer and take credit make sure to manage this ratio in your favor, by collecting cash from your debtors faster than you pay it out to creditors.

Look closely at stocks that aren’t selling and consider liquidating them to free up working capital. However it’s important to balance this liberation of cash with the potential consequences of reported short term losses in your books.

Solvency means that you own more than you owe, and you’ve a manageable debt load. A buyer will make their own decisions on longer term financing. What happens to existing debt may form part of price negotiations.

Related: How to Sell a Business with Debt

If you don’t feel that your finances are in good order it’s imperative that you quickly do something about it.

Seek a qualified accountant or book keeper to help you out. They can also assist with professional data presentation using trend analysis for key performance measures, in particular sales and profits. Simple trend graphs are particularly powerful.

Summarizing this section, make sure your business finances are sound and well presented. Make other changes only if there's an excellent chance of a significant payback. Checking first that they can be realistically implemented in the time available, allowing for possible slippages when implementing the change schedule.

3. Implementing the changes

By this point you can either:

  • Decide on substantive change action(s)
  • Fix basic finances
  • Make cosmetic, presentational changes only
  • Do nothing

You may find yourself doing one or all of the first three bullet points.

If, having read this How-to Guide, you’re comfortable that everything’s in order, then move on to the next stage of the selling process.

If you intend to make substantive change, it pays first to analyze the numbers before scoping the project and then developing clear plans for successful implementation.

A question checklist is useful here to cover your bases:

  • Which? – changes to make
  • Why? – are you making the changes (the business case justification)
  • How much? – what is the extra cost and how will this impact the business valuation
  • What? – specifically, are the tasks that need to be done
  • How? – will they be accomplished
  • Who? – will undertake the specific tasks and be Project Manager (you, or a member of your internal or external business sale team?)
  • When? – will each activity in the sequence be completed (specific "completed by" dates allowing for some slippage)
  • What? – are the milestone review points and targets
  • How? – will you know that you're on track, and the project is complete

As you (or a co-owner) stand to gain most, one of you is likely to project manage the changes.

You may choose your own methods to plan and keep the project on track, ranging from use of a simple diary to project planning software. ExitAdviser also provides an online note taking facility enabling you to keep your notes in one accessible, secure place.

This section summarizes the planning and implementation phase of change activities, whether substantive, financial "fix", or presentational in nature.

Published by ExitAdviser


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