Selling Your KC Business? 5 Expert Tips to Help You Get the Most Money from the Sale
By guest contributor, Jack Harwell, business advisor at Kansas SBDC at Johnson County Community College
Are you selling your business? You can improve your chances of getting a higher price if you prepare. Plus, you never know when opportunity might come knocking, so read on to make sure you’ve taken the right steps so you’re ready.
Planning an exit soon? If you’re not sure if now is the right time to sell your business, make sure you’ve made these three important considerations before you move forward.
How to get started on your exit plan: If you want to know more about the basics of exit planning and some common strategies you can use (because at some point, you WILL exit your business), explore my overview blog where I answer some of the most common questions about exit-planning.
Build a team
Start with assembling a team of experts. At a minimum, the team should include an attorney, a CPA (certified public accountant) and an exit-planning advisor.
The exit-planning advisor acts as your quarterback, helping you think through your options with analysis and outcome simulations. This advisor documents and communicates your exit strategy so everyone is on the same page.
Choose an attorney experienced in business transitions so they can advise you on what could happen and ensure the contract documents reflect your wishes.
You will probably pay tax on the proceeds of the sale, so having a CPA on your team will allow you to predict the federal and state tax liabilities you will incur. This is important because the sale price needs to include not only the amount you need from the sale, but also the taxes that will come off the top.
You may also want to hire a business broker or M&A (mergers and acquisitions) advisor. This professional can provide insight about the current market, find a buyer, set expectations for the sale and guide you through the sales process.
Project the outcome
Selling your business will be one of the most important milestones in your lifetime. If you’re like most business owners I know, this will also be one of the most stressful periods of your life. When the stakes are this high, it’s good to know what could happen and to think through other potential outcomes. Surprises can escalate your stress levels and may cloud your judgement when you need it the most.
Your team can help you with this step. They can advise you of your options along with the potential benefits and costs of each scenario. Take advantage of their experiences. Talk through the details of the process and ask questions about the risks and rewards.
More strategies below …
Address the risks
The value of a business depends on the cash that business generates. But if an interested buyer sees something that could be a risk to those future cash flows, they will discount the price. For example, one of the most common risks is an owner who is too involved in running the business.
Business owners who make all decisions and insert themselves into every aspect of the operation have built a company that cannot succeed without them.
You can build value in your business by establishing reliable processes and training your staff to deliver quality products and services without you. Even if you take a month off, revenue should grow and only the strategic-level decisions left for your return.
Robust and repeatable processes are a hallmark of a well-run company. Not only do they support the autonomy of your team, these processes also ensure consistent delivery and better customer satisfaction.
Another area of risk is when too many sales dollars depend on too few customers. If any one customer makes up 20% or more of your total revenue, it could decimate your cash flows if that customer takes their business elsewhere. Worst yet, if the customer is aware of the dominance they hold, they could push to gain price advantage or other concessions to keep their business with you.
Enhance your curb appeal
In real estate, you paint the front door, mow the yard and trim the bushes. In selling a business, what we’re talking about is eliminating cause for a buyer’s concern about the health of your business.
The first thing a prospective buyer sees in your company is your financial performance. Even though enjoying company-paid perks is one benefit of owning your own business, these expenses are a drag on profitability. They reduce your cash flows and require explanation. It is much better if you keep these owner expenses off the books, or at least organize them in a section below “Net Operating Profit” on the P&L. You should also include EBITDA calculations (Earnings Before Interest, Tax, Depreciation and Amortization) at the bottom of the P&L. This is to document your true cash flows clearly and in real time.
To continue the real estate metaphor, clear the clutter and stage the office. It’s hard to believe a company is operating at a high level of quality if the back office is in disarray. Arrange everything to look professional and efficient.
During the due diligence process, the buyer will look through files and ask to see various reports and other data. Organize your files so they are accessible. It’s stressful to have a stranger inspect every part of your business, looking for red flags that may kill the deal. The stress goes even higher if you can’t find something that should be at your fingertips.
You should also clean and organize the stockroom. Nothing says inefficiency like an unopened, dusty box sitting on the shelf with an overnight shipping label printed five years ago. Discard all obsolete inventory. The fewer opportunities to discuss why something didn’t sell, the better.
Always be prepared
Even if you don’t plan to sell your business soon, it should be ready in case a sweetheart deal lands in your lap. In addition, the steps I described above will enhance the value and profitability of your business before you exit. I never understood why someone would wait until a buyer requires them to upgrade their home to sell it. Why not enjoy the upgrade before the buyer comes along?
Need help planning your exit? The Kansas Center for Business Transition is a joint effort of Johnson County Community College and the Kansas Small Business Development Center. We provide tools and free advice to help small business owners plan and execute their exit from the business. Whether it is around the corner or years from now, you will exit your business. The Kansas Center for Business Transition can help ensure you exit on your terms.
Learn more about the resources the Kansas SBDC offers by contacting business advisor Jack Harwell at [email protected]. Also, explore free exit-planning tools from the Kansas Center for Business Transition.