How to Prepare a Business for Sale
There are a few things business owners need to keep in mind when considering the sale of their business. This is such a huge and important life event that needs to be treated with care and due diligence if you want the transition to be as smooth, profitable and timely as possible. Too often, owners don’t consider the importance of how well a business needs be presented in order to generate multiple offers. That’s why the process for most people actually begins a year before going on the market. I’m going to go over the best-practice steps for preparing an exit and getting your business sold right.
Step 1: Prepare the Business in Advance
We recently helped Rob, a business owner of an Ecommerce selling appliances, sell his company for their full asking price of $2,000,000 plus inventory. It’s not very common that sellers get exactly what they want in a business negotiation. In fact, most businesses sell for 25-35 percent less than asking price. Rob was able to get what he wanted because his company was well organized, documented, efficient, and consistent in sales. If it wasn’t for his hard work in making the business as attractive as it was, he would have never been able to get his asking price based on profits alone.
This step may very well be the most important for any business owner that wants to generate the best offers while on the market. It’s often overlooked but can mean the difference between selling for $300,000 or selling for $500,000. It can help you sell within months compared to over a year or never even reaching the finish line. A great exit strategy really begins a year or more before you even list the business for sale. You want to look for anything that can make the business more profitable and more attractive to potential buyers.
It’s best to work with a business advisor in order to help guide you through preparation and get you on the market at the highest price possible. They will look over your financials and operations to find any inefficiencies or areas that could be improved. Our team is composed of active investors who are experienced and knowledgeable with doing exactly this for all the businesses they acquire. Some of the activities our advisors may help you with include streamlining processes, cutting unnecessary expenses, hiring offshore teams, cleaning up the books, compiling email and phone lists, and documenting all systems and processes.
The goal here is not only to make the business more profitable, but also to make it more automated so investors will see it as a turnkey opportunity. It’s a hard sell if the business is dependent on the current owner. Would you rather buy a business that’s disorganized and relies heavily on the owner’s participation, or one that has all its systems in place with a team handling most of the daily tasks?
Step 2: Determine Value and Listing Price
Most owners think the value of a business is simply calculated by a multiple of profits or EBITDA. While this does hold some truth, there are other factors that need to be considered to find its MPSP (most probable sales price) and the best price to list at.
First, your broker will request financials for at least the last three years. They will be looking at income statements, balance sheets, and tax returns. Once they have this information, they will begin a recast. The reason behind the recast is to show the companies actual earning potential. Whenever the financials were first recorded, the end goal in mind was to lower profits so that the tax burden would be lower. This isn’t helpful when you want to sell the business because you want to show the highest possible earnings, not the lowest.
The broker will schedule a time with the owner to go over financials and ask questions to help find anything that can be added back in. Some of the common adjustments are owner’s salary, bad debt, depreciation, interest, travel & entertainment expenses, and one-time charges like buying new equipment. There are many other expenses as well COGS that could be considered, but it’s all situational and will come up during the conversation with your broker.
After they complete the recast and find the adjusted discretionary earnings, it’s time to look at the more hidden and difficult to value aspects of the business. This is where the activities from step one will come to fruition and help push your asking price even higher. A major component in this is the goodwill of the company. This is any intangible asset that adds value such as brand recognition, great customer relations, a solid customer base, and good relations with employees and managers. There are also other variables that can add intrinsic value such as the condition of the assets, marketplace demand, overall strength of the business, location, sales contracts, current market and industry trends, and future expected earnings. Calculating these factors is both a science and an art, and there is no exact way of doing it right.
The price your broker comes up with should actually be a range and not just a single price point. It will be up to you as the seller to determine where in that range you want to list at. Keep in mind that the higher you price it, the longer it will take to sell. Price too high and you won’t generate any interest from buyers. Price too low and you may be selling yourself short.
Step 3: Create a Detailed CBR (Confidential Business Review)
The CBR goes by many other names such as CIM (Confidential Information Memorandum), Offering Memorandum, Offering Summery, and Prospectus. They all mean the same thing, so don’t get confused if you see different language used by different brokers. This is a comprehensive document of information about the business for prospective buyers to review before deciding on making an offer. It’s vital that the CBR is well-written and put together professionally so it can be used to showcase the business. If it’s disorganized or done poorly, a good buyer will take one quick look and walk away to find something else.
If done correctly, the CBR will cover the majority of the information a potential buyer will need to know. It summarizes everything: A short business and owner bio, clientele, employees, management, products and services, industry trend, market share, advertising, financials, growth opportunities, and competition.
There are three main sections that make up the CBR. The first is the Executive Summery. This is usually a full page and includes a short summery of the business and owner, an abbreviated income statement, and the price and terms. The second part is the business description and should include any photos that buyers might want to see. This section consists of a narrative of the past and present, reasons the owner is selling, possible future growth, and details about the transaction process. The third section is where all the financial data should go. It includes the last three years of income statements as well as company tax returns. It could also include a forecast of where the business is heading for the new owner.
There should also be a FAQ section included at the end that covers a number of prepared questions the broker will go over with the seller. This section is great because it has a ton of information that buyers often ask about but isn’t typically included anywhere else in the CBR.
Moving Forward
After a listing price is chosen and the seller reviews the CBR to make sure everything looks good, the broker will then start marketing the business for sale. There is a wide variety of marketplaces brokers can choose from, but you want to make sure they are placing your business on at least five different websites, as well as an official statewide business MLS like BBF (Business Brokers of Florida). Our team also advertises our clients’ listings directly to our personal list of investors. Sometimes that alone can generate offers, because these are buyers that know and trust us.
Preparing a business to sell may seem like a lot of hard and complicated work. It’s actually much simpler though when you hire the right team of advisors and brokers who can help with every step along the way. Making sure your business is well organized, valued properly, and expertly marketed are all key components to getting sold for top dollar and in a timely manner. If you would like a free consultation for more help, feel free to contact our team anytime at 386-262-6612. We would love to hear from you.
