The number one mistake business owners make in selling their company is not preparing soon enough.
Whether you want to sell your company now or in the next 5 years, these are 5 steps to maximize your company’s value. These issues are critical. Proper preparation will enhance the value of your company, make the transaction flow more smoothly, and avoid pitfalls that often terminate transactions midstream.
1. Strive to Increase Profits and Cash Flow
The most important factor in determining the value of a business is “The company’s profits”. The Acquirer buying your business will likely secure a loan for the purchase—and they will be using the business profits to make their monthly payments. That is why maximum profitability, as well as healthy cash flow, is so important to the value of your business. If you can create recurring revenue, you enjoy increased profits; buyers will pay more for the company.
2. Clean Up the Financial Statements
If you are planning to sell your company in the next five (5) years, it is time to starting keeping “Clean” financial statements. If you are running personal expenses through the company, it is time to STOP. It is acceptable to have the company pay you a salary, pay for insurance (health, life and disability), retirement plans (401k or IRA) or even pay rent for the building you own personally. However, buyers expect accurate, detailed financials.
3. Remove Owner and Key Employee Dependency
If the business cannot run without you, you do not have anything to sell. You should start cross-training your employees to have at least one backup person for each position. It may be a good time to talk to your attorney about having employees sign a non-interference, non-circumvent or even a non-compete agreement. This is not required for all employees, but it is a good idea for any key employees. This would also be a good time to update or create an operations manual. This can be as simple as the employees documenting what they do. It will make it easier to hire and train new employees, if needed. If you have family members working in the business that will not be available after the sale, it is time to start transitioning them out of the business. When a buyer purchases the business, they generally will want to keep all the employees.
4. Diversify Your Customer Base
Do not put all your eggs in one basket. If 30% or more of your revenue comes from one customer, the buyers and banks will be concerned by this. In some industries, it is common to have higher customer concentrations, but try to diversify as much as possible by adding new customers.
5. Sell Obsolete Equipment and Inventory
If you have equipment or inventory that is obsolete or not contributing to the profits, then sell it. If you have equipment that is only occasionally used and is not vital to your operations or you can rent it, think about doing that. A general rule is that every piece of equipment needs to generate enough profit to pay for itself every three years. The same thing goes for inventory – does it make economical sense to keep an item in stock? Every business is different and you need to evaluate your inventory levels and availability of re-stocking.
If you are thinking about selling your business within the next five (5) years, you might want to start talking to your attorney, CPA and one of our brokers. We offer a FREE pre-sale consultation to you to increase the value of your company.