If you’re looking to sell a business, it’s critical to look at the value of the business. A typical business has two values: the “academic” value, which a professional business valuation determines, and the “true market” value. The academic value comes from a formula based on the firm’s hard assets, cash flow, industry averages, and multiples. The fair market value also takes those items into consideration, but then considers what buyers are really willing to pay.
A fundamental aspect of preparing a business for sale is understanding both its academic and true market value. With a strong valuation and understanding, entrepreneurs can search for quality candidates to take over and negotiate in confidence.
For many small and mid-sized businesses, hard assets like equipment, vehicles, land, buildings, and inventory may be limited. For some small companies, there may be no hard assets at all. Instead, their value is based on intangibles like employees, business processes, customer lists, location, and business relationships.
To maximize the fair market value of your business, it’s vital that you capitalize on those intangible assets. Below, we’ll explain how to prepare your business for sale and how to make your business more valuable and attractive to potential buyers.
Develop key employees.
Buyers generally aren’t interested in paying a premium if the business relies on you for its success. Once you’re out of the picture, the value of the business tanks. To avoid this, delegate responsibility to key employees and involve your most important staff members in the decision-making process. Demonstrating that your company’s success is reliant on your capable, well-trained employees – not just you – will pay off at the time of the sale.
Document what you do.
Be sure to document all job descriptions, operation processes, and strategic plans. Documented records and plans give a buyer greater confidence that he or she can emulate your successful growth and will help your buyer obtain financing. Also, be sure to keep business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean and well-organized. Potential buyers won’t want to buy a business with messy records that they will have to untangle after purchasing.
Build relationships.
Name recognition, customer awareness and your reputation are all part of your business’s value. Even if your company doesn’t have many hard assets, its relationships are key. Consider diversifying both supplier and customer accounts.
Improve cash flows.
A potential buyer wants to see the “true cash flow” of your business. In the business world, cash is king. Be sure you are driving all income to the bottom line to make your business appear as healthy and attractive as possible.
Review your assets.
A key part of preparing a business for sale is selling off or disposing of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use. This will make your business leaner and more efficient in the eyes of the buyer.
Find and build your niche.
You don’t have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry.
Remodel, clean, and organize.
What’s the first thing anyone does when they put their home on the market? They spruce things up and make sure everything is in its right place. Yet, in business, that’s rarely a consideration. A well-maintained facility, however, will fetch the best price. Even businesses that lease space can benefit from thorough cleaning and organization to convey a feeling of quality and efficiency.
Keep these important intangible assets in mind if you’re looking to sell your business. They convey a value that financial statements alone do not. If you are looking to sell, make a plan. Start working on the intangibles well in advance of putting your business on the market. For many business owners, they reach a point where they burn out and psychologically retire early before a sale is made. It’s important to work to keep your focus right until the sale is complete.
Finally, when the time to put your business on the market arrives, consider lining up key specialists who will help you make the most of the sale, such as an attorney, an accountant, and a business intermediary to name a few. Selecting a benefits broker for your business will help make the process much easier, put your business in front of more potential buyers, and make the transition much smoother. Remember, you only have one chance to sell your business, so you want to do it right.
