When it comes to planning for the eventual sale of a business, sooner is always better than later. And as with any well-organized plan, the proof is in the process – one that begins with determining the value of your business and taking the steps to increase its worth.
First, you should know the current value of your business. Begin by obtaining an opinion of value and an assessment of risks affecting value from a professional business broker or accredited valuation consultant. To help prepare, you will need three years financials or tax returns to get started.
Issues that go beyond the numbers in determining the value and ability to sell your business include several considerations important to a buyer:
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Comprehensive monthly financials. These include profit and loss reports and accurate balance sheets.
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Customer concentration. If your company does more than 20% of its business with one client, this can be considered a risk to a prospective buyer. A customer base that is spread out is an advantage.
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Supplier concentration. If you deal with one or two suppliers and they pull or trim their product line, where will that leave your business?
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Cash-flow quality. Sometimes referred to as “sticky revenue,” cash flow that recurs regularly is obviously worth more than a business that is constantly seeking to attract new, one-time customers. The key is to structure your business so that clients return, again and again. Consider a Newport flower shop owner whose business relies primarily on a handful of holidays throughout the year, translating into a high spoilage rate and a business model that is not exactly blooming. But if that florist sells to hotels, or convention centers on a repeat contractual basis, spoilage rate is reduced, and financial stability is increased.
[Don’t] be “that guy” who sells and services pagers in 2020.
A business that maintains processes and written procedures carries much more weight on the “sellable” scale.
Your business may have garnered an outstanding reputation for a proprietary product over the years, but if you don’t keep up with the times, that product/service/offering that has come to define your company may not be enough to attract a buyer when it comes time to sell. It’s essential to look forward and keep an eye on the competition, technology and the market landscape.
You do not want to be “that guy” who sells and services pagers in 2020. Sure, there are companies that still do that, as part of their service offerings, but it’s no longer 1994, so diversify! It’s vital to remain relevant and consistently attract new generations of customers.
Having a strong management team in place is another imperative when selling a business. Your Warwick-based manufacturing company may do multimillions of dollars in annual sales, but if the owners and managers are close to or at retirement age, then who is next in line of succession? Companies looking to sell should have a next generation of leadership to take over – a management team that can seamlessly be included as part of the sale.
Employment agreements with key employees can be of great benefit when transferring business ownership. While noncompete and nonsolicitation accords can be viewed as difficult to enforce, they are psychologically valuable to a prospective buyer who will want to retain the company’s primary management professionals.
And let’s not overlook the importance of compliance and licensing. This is an area of utter importance to a prospective buyer.
Ultimately, the best place to start when looking to transition business ownership is to find out its current worth. A competent industry consultant can provide categorical risk scores to allow you to consider the changes that could be made to get the most for your business. The best part is, making these changes often results in increased profitability before a sale!
Gary Rayberg is president of Rockland, Mass.-based ROI Corp.
