How to Adequately Prepare for the Sale of Your Business
What Most Online Articles Fail to Address
Selling a business is complicated. It’s no surprise that such a complex transition requires time and effort to execute well. That being said — why do so many small business owners fail to adequately prepare for the sale of their business? This article will detail what information can be gathered from the market conditions of small business sale and acquisition, as well as numerous ways that small business owners can prepare for the sale of their business most effectively.
In-Depth Preparation / Key Drivers of Value
There are a myriad of articles across the internet aimed at advising the sale of a small business to owners. These articles contain a lot of great analysis and important ideas to think about, however, I’m typically underwhelmed by the advice given (or lack thereof). Here are eight key drivers of value to focus on before beginning the selling process that are far too overlooked.
Financial Performance / Historical Data
When you sell a business, you’re going to have to present a number of financial documents. The potential buyer is essentially going to need to see the entire financial scope of your company. Necessary documents include but are not limited to:
- P&L statements for the past 2-3 years (potentially longer P&L history)
- Company tax returns for the past 2-3 years
- Cash Flow Statements
- Non-Disclosure agreements
- Insurance policies
- Current lease copy
- Executive summary of the entire business
- Supplier/Distributor Contracts
- Employment agreements
- Offer to purchase agreement
This is a long list, and it’s not the entirety of necessary documents. All of these documents take time and effort to acquire, but doing so far in advance will prove to be important. If all of these documents are readily accessible and in one place, the next step would be to improve upon them in preparation for a sale. The improvement process is not necessarily a short-term project, and can take a few years to execute well. Nonetheless, nothing comes easy, and getting a handle on all financial data, understanding what it means, and working to improve upon it before a sale is worth it — full stop.
The Switzerland Structure
What is the Switzerland structure? The Switzerland model relies on creating a fortified business structure that does not rely too heavily on any one manufacturer, employee, or client. If your business is susceptible to a change in any of these factors, it’s a great idea to look towards diminishing an overreliance in any of these categories.
If a potential buyer of your business examines a large overdependence on a particular supplier, that will not go unnoticed. In the event that your majority supplier is unreliable, this reflects on your business. Your supplier is a large determinant in the success of your business, therefore essentially making it an integral piece of your business. Making an effort to connect with multiple reliable manufacturers will provide more fortitude.
Additionally, if your company is overly reliant on a particular customer base, marketing efforts to expand your customer base could be a solution to this problem. As mentioned before, this process takes time — it’s impossible to arrange a marketing plan, execute it successfully, and revamp your customer base in a few weeks. Nonetheless, adapting your company to align with the Switzerland structure ideals will strengthen it.
Buyers will be examining your business’ ability to manage cash flow. Why is this important? The ability to have a positive cash flow provides opportunity for growth via reinvestment in the company. What is the first thing that a buyer aims to do when they buy a company? Grow it. It makes sense why buyers are looking for businesses that have been proven to positively cash flow, because the opportunities for investment in growth are much more accessible.
This concept is best demonstrated with a real-world example. Let’s say your business has a potential buyer that specializes in optimizing a sales team in order to spur growth. This buyer is going to need money to invest in the company in order to fulfill this goal. If your business is not cash flowing enough money to undertake this project, then the buyer will be discouraged. On the other hand, if your business has a three-year track record of exceptional cash flows, this buyer is going to be super optimistic about the potential to acquire funding to invest in growth.
There’s a reason why over the past decade more and more companies have been transitioning to subscriptions. There is a laundry list of reasons why this strategy is sought after. Listed below are reasons why recurring revenue is so powerful.
Benefits for Investors
- Utilizing big data, many investors will be able to accurately predict the consumer base growth over time more effectively than other models.
- Generating a monthly forecast is drastically easier and more accurate, especially following a monthly subscription schedule. The likelihood of a major fluctuation in business is minimized, and investors love predictability.
- Growth Management
- Operating under a company with recurring monthly revenues provides greater opportunities. For example, it’s easier to track individual team performance, as well as budget for future projects. With greater predictability regarding what to expect, it’s easier to grow.
What makes your company different from others? Does your product have a distinguishable factor that draws consumers away from your competitors? Having something that pulls consumers in, and cannot be easily replicated by others is a significant driver of value.
Having an X-Factor that can be monopolized is easier said than done. It may be that your company’s differentiating factor is customer satisfaction, however a tangible good or service that can be expounded upon is a great way to drive value upwards.
Growth Potential / Macroeconomic Awareness
Macroeconomic trends are key determinants in the success of a business and that business’ future outlook. Making a conscious effort to position your business within promising industries is an excellent way to drive up your company’s valuation. In practice, understanding which industries are growing and adapting your business to fit them in a timely manner will be extremely effective.
For instance, if you are creating a product in a dying business, how can you shift your operations to fit into a more promising business? Now that streaming is the norm for music consumption, a company that made CDs needed to adapt in order to utilize their current operations and shift to something more current. Staying aware of macroeconomic trends that relate to your business, and getting ahead of the curve in terms of adaptability is a great practice.
Customer satisfaction is another aspect that drives value. Your business is nothing without customers, so with that being said, there is large focus on how satisfied your customer base is.
It’s one thing to have a customer base that is satisfied, and it’s another thing to effectively communicate how loyal your customer base is, and how satisfied they are. An effective way to communicate this idea is to quantify your customer’s satisfaction.
For instance, if you have repeat customers, it could be worth incentivizing them to create an online review. If you truly believe in your product, then it makes sense to acquire as many positive reviews as possible. Buyers love to see that there is currently a large demand for the business, and having a plethora of both online reviews and verbal statements regarding customer satisfaction is a big plus. Small business owners are constantly doing whatever they can to satisfy customers, but not every small business owner communicates just how satisfied their customers are effectively enough.
Ability for Growth without Daily Participation
What would happen to your business if you stepped away from it for a week? If you think that your business would slow down substantially, then there is work that can be done to improve your business’ resilience. Serial buyers of small businesses value this form of resiliency immensely. For instance, if a larger firm buys your company and they are currently working to grow multiple businesses, it is very valuable for your business to be able to continue to grow without constant active management.
Similar to the idea of the Switzerland Structure, if you stepped away from the company for a time and operations slowed, then you are too important for your company’s own good! Prior to a sale, it is worth making yourself more replaceable in a regard. In fact, it has been noted that large banks around the world force two-week vacations onto executives to assure that the company will remain resilient during this time.
Thinking about the idea of eliminating risk associated with executives becoming too important to the success of the company — it makes a lot of sense. If you are planning on selling your business, but you are the superglue that holds it together, what is the buyer going to do once you leave? They won’t hire you to work an executive role at the business you just sold. That being said, conveying that your business runs smoothly without you present is very advantageous for buyers and will drive the value of your business upwards in a transaction.
The Time to Act is Now!
We hope that you found this information insightful and are empowered to act on any knowledge you gained. We hope that you have relevant takeaways that you can act upon, and look forward to hearing any potential insights you may have.
To learn more or start a conversation regarding the sale of your business, contact our team at Tsetserra Growth Partners here. We look forward to continuing the conversation!