Selling your business is a major decision, and one that you want to really think about before making. Once you have decided that it is time to sell, there are some important steps to take to help make the process as easy as possible and maximize the amount you can get paid. This blog post identifies several important things you can do to prepare for the sale of your company.
Clean Up Your Financials
A potential buyer will always want to see the financials of the business. In most cases, they will want to look at financial data for at least the last several years. If you can’t provide them clean and accurate information, they will be very hesitant to move forward with a deal. Likewise, even if they do move forward with the deal, it may not be appropriately priced because neither the buyer or the seller can really tell how the business is truly performing.
Tax tip: Selling a business is also going to create a taxable event in almost every case. If you don’t have accurate financial information, it will make it much more difficult to handle your taxes in the year that the company sells. Taking the time to clean up your financials will make it easier to sell your business, and deal with the future implications of this event.
Understand the Value Drivers
The total value of a business is much more than just how much money it is making at any given time, and a potential buyer will know this. You need to understand the statistics in your business or industry that lead to the highest sales prices.
These are the “value drivers”. Some examples of this may include the following, however, there may be many more depending on your business and industry:
Annual or Monthly Recurring Revenue. For many businesses, the amount of recurring revenue that the business can count on will drive what a buyer will pay for the business. If you have contractual terms to your the sale of your product or service (and you should), then make sure that you’re locking in as long of a term as possible. Also, it’s a good time to make sure the “assignment” provision will allow you to transfer the contract in connection with an M&A transaction.
Customer Diversity and (Lack of) Concentration. While it may be great to have 1 or 2 big customers that provide substantial revenue to the business, such customer concentration can be a big risk for a buyer. If those customers go away or don’t like the new ownership (for whatever reason), they will go away and the business’ performance will be drastically affected. Thus, the more diverse and unconcentrated your customer base is, the more attractive it will be to a buyer.
Management Depth. A buyer takes on a lot more risk in buying a business when the key manager of the company is the selling owner. Thus, it’s better for the seller to establish a deep and structured management team before the sale, as doing so will provide a greater likelihood of transitioning the ownership and provide the buyer with a better framework from which they can make replacements if managers leave. Start with building an “Accountability Chart” like this one. https://blog.eosworldwide.com/blog/5-tips-for-building-out-your-accountability-chart
Proprietary Products or Technology. Sometimes a revolutionary or superior product or technology can have great appeal to a buyer. For example, such buyer may be able to push that product or technology through its existing sales channels and instantly increase the number of customers utilizing such products or technology. This can be very attractive to buyers and lead to a greater value to the company.
Organize & Address Legal Matters
Taking care of all legal matters related to your business will help make it a much more attractive option for buyers. This would include addressing any contract issues, investor issues, or other governance matters before you get too deep into the process (and realize that you’ve “left money on the table”).
Doida Law Group offers clients who are thinking about selling their business a “Due Diligence Checklist” that goes over these, and many other, important items.
Please contact us to schedule a consultation and get your checklist started right away. You’ll be well on your way to selling your business.