How Far in Advance Should You Prepare to Sell Your Business?
If you're thinking about selling your business, and you are not in a hurry, you can materially improve the ultimate sale price by making your business more “sellable” and valuable to a third-party.
How Early Should You Start?
Depending on the nature of your business, and its current condition, it can take anywhere from 18-36 months to prepare and organize your financials, offload your own responsibilities to employees, implement any reasonable performance improvements you've been putting off, and get your valuation together.
How Much (Time and/or Money) Should You Invest in Improvements?
Since most business sale prices hinge on a multiple of earnings, any improvement you can make to the bottom-line we be repaid several times at sale close. For example, if you're selling a manufacturing business at a multiple of 3x earnings, and you are able to improve discretionary earnings by $20,000 annually, that may translate into an additional $60,000 at sale close.
Now, it's not that black and white in the real world, but you should operate with a mindset of ROI as you decide how much effort to put into making pre-sale improvements.
(For more, see How to Increase The Value of Your Business to Sell It).
Then there are the operational improvements that may not affect financials but make your business much more appealing to buyers. Near the top of the list is getting yourself out of the picture. One of the most difficult things for business owners to do before selling is start getting away from day-to-day work. Business buyers are looking for operations they can acquire without having to also pick up a full-time job.
Prioritize The Important Financial & Operational Aspects
- Eliminate Unnecessary Expenses – The quickest path to improved earnings is to minimize expenses. In any business that has been operating for some time, there may be expenses that have been part of the budget for years without consideration to their actual contribution to the business.
- Cultivate Recurring Revenue – Any options to generate extra income for additional products/services on a recurring basis will make a huge difference to the businesses value to third parties.
- Clean Up Your Financial Records – Make your financials as transparent and accurate as possible. Consider how they align with your tax records.
- Eliminate Your Position in Daily Operations – As much as possible, make yourself redundant. Train key employees to manage your normal workload and tasks. Promote a trusted to employee to a managerial position. It may even be beneficial to hire someone to manage daily operations if no employees are up to the task.
- Document Operating Procedures – How many things need to happen every week, month, quarter, to run your business effectively? Sales and marketing functions, material supplies and suppliers, equipment maintenance, production, service, human resources. Any buyer looking to pick up the reigns will need a roadmap of core business functions.
As you plan your business sale timeline, also consider that it will take at least six months to sell your business once you've listed it for sale – more likely a year. So, make sure you start preparing early enough to meet any timeline goals you have.
For more tips on what to address first, Scot Cockroft of Sigma Mergers & Acquisitions offers a list of financial and operational issues that routinely get in the way of owners selling at the price they hoped for.
If you really want to get into the weeds, spend some time in our Learning Center, starting with Exit Planning.