*Note: This article is one in a three part series. You can find the entire series here: Part 1 | Part 2 | Part 3
Preparing for a sale can add substantial value for you as a seller, if you do it early and correctly. Part 1 covered transition plans and management incentives, and Part 2 covered key financial decision making and organization.
Once you have been through those steps, continue with the steps below.
Create a future strategic plan
Nobody wants to buy a business that has its best years behind it and is on the decline. Buyers pay more for future opportunities and growth.
Even though you may be ready to sell your business, you need to demonstrate that your business still has plenty of opportunities ahead of it. Therefore, it is important that you create a three to five year strategic plan for the business.
This will both help you to identify opportunities and issues to address prior to selling the business and give potential buyers a roadmap to growth prospects for the future.
The more opportunities and growth that you can demonstrate to a buyer, the more value they will likely place on the business.
Beware of making unnecessary additional investments
If you are contemplating a sale, resist the urge to make investments that aren’t required to keep the business operating or those that may not show a financial benefit in the short-term, like an acquisition.
If you are planning an exit within a few years, it is risky to have to integrate an acquisition successfully on a short time table or pursue a brand new and unproven operating strategy. This is as important a time as ever to make sure that the rewards justify the risks.
If an investment lowers your financial performance in the short run, you may be penalized in terms of a lower valuation, even if the investment pays off in the long run. Obtain objective input from your trusted service providers to give you an extra level of scrutiny to ensure that your investment doesn’t decrease the company’s value during a sale.
Also, beware of making acquisitions or pursuing opportunities that could complicate your business to investors. For example, if you sell a shelf-stable food product and you all of a sudden go into a product that needs to be refrigerated during transportation, that could limit the number of buyers for your business, as some buyers that have shelf-stable only distribution may not see the combined business as a fit for their business at all or might give you less value for it.
Beware of business cycles
While you can’t always time the market for selling your business, you can time your own business cycle.
If your business is growing, you may worry that your next year will be bigger and that you may be missing out on value by selling it today.
However, timing works both ways and you will severely decrease the value you receive for your business if you wait to sell until the growth has slowed.
I personally have seen the sale value of businesses cut literally in half because the owners waited one year too long and sold after a non-growth year.
Growth businesses get to participate in future value through getting a larger, growth-oriented valuation multiple for the business. Also, there are mechanisms such as earn-out structures that can help you to participate in future growth in of the business.
After reviewing your numbers, if you have had growth over the past few years and expect that to continue for at least the next year, you are at the right point in your business cycle to take advantage of a sale. If you have hit the skids, you will want to right the ship in order to get the most value possible from selling your business.
Selling a business can be an emotional endeavor, but can also create a serious pay day for you as an entrepreneur. Be thoughtful and thorough on your preparation to make the sales process pay off for you.
*Note: This article is one in a three part series. You can find the entire series here: Part 1 | Part 2 | Part 3
