How to Plan Your Exit and Increase Business Value Before a Sale
Discover how to develop an effective exit strategy and maximize your business's value. Set clear exit goals, understand what attracts buyers, and implement strategies to boost value and sale price. Excerpted from BizBuySell's Guide to Selling Your Business.
Transcript:
Planning your exit and building pre-sale business value. Planning your business exit begins by defining your motivations and objectives, the circumstances driving your desire or need to exit, the urgency or flexibility of your exit time frame, your financial hopes or expectations, your desire to exit immediately or to remain with the business post sale, either during the transition period or for longer period, your conditions, if any, for how and where the business will continue under new ownership.
The first step in exit planning is to establish the outcome you seek to achieve through the sale of your business.
Your sale goal. What is your desired sale outcome? To sell your business in part and remain
involved with its operation. To sell your business in full and remain involved with its operation. To sell your business in full and end involvement with its operation.
Your timing objective. For what exit time frame are you aiming? Immediate 0 to 6 months. Within a year. Within two to three or more years.
Your financial objective. What is your financial expectation? My business is in strong condition and likely to command a high earnings multiple. I am prepared to accept a lower price due to my timing urgency and the current condition of my business. I am willing to commit time and effort to strengthen my business condition and therefore improve its likely attractiveness and earnings multiple.
Your payout objective. Will you require all cash at closing? Or are you willing to offer a seller financed loan, realizing that all cash closings most often result in lower sale prices.
Your sale marketing objective. Have you defined your preferred buyer? Or are you interested in selling to any qualified buyer, whether a business or an individual? I prefer or am obligated to sell to a partner, key employee, employee group, or family member. I intend to pursue a sale to a targeted business, such as a supplier, competitor, or strategic business buyer. I seek to sell to any buyer who has the necessary financial expertise and management capability to buy my business.
Your personal post sale objective. I want to stay involved with my business after its sale in a managerial capacity or as a consultant or board member. I am willing to remain involved over a post-sale transition period of 1 to 3 months or longer. I prefer to end my relationship with the business upon completion of the sale.
Your post-sale objective for your business. I prefer to sell to a buyer who plans to retain employees and to cause little disruption to staff clients or customers of the business. I am willing to sell to a buyer who plans to merge move or significantly alter the business.
Understanding what business buyers want. Businesses that gain the highest ratings in all areas sell for the highest prices while those with good to medium conditions sell at lower prices and those with poor conditions likely are not considered as purchase prospects without significant pre-sale improvements.
All buyers seek businesses with strength in the conditions listed in this section.
Strong revenues and profits. When buyers evaluate businesses money talks first and loudest. they are looking for increasing sales, increasing profits, and especially strong owner earnings. Owner earnings become the basis of the business valuation with higher earnings leading to higher business prices.
Strong financial condition. Buyers want to review financial statements that go back at least 3 years.
Clear legal condition. Buyers avoid business with legal issues or signals that legal issues lie ahead in the form of lawsuits, contract disputes, or pending legal actions.
Distinct and competitive products and services. Buyers are attracted to businesses with products and services that are in strong demand and that generate steadily increasing revenues and profits.
Location. Buyers seek businesses that are well positioned geographically and within Industries or business sectors that are strong and growing.
Facilities and equipment. Buyers value modern facilities and equipment that is either owned
outright by the business or on long-term transferable leases.
Capabilities and processes. Buyers seek businesses with systems in place to achieve financial goals and keep the business running smoothly.
Staffing. Buyers want assurance that the business success does not rely solely on the current owner's management skills and knowledge.
Clientele. Buyers want to see that the business has a loyal clientele a broad client roster rather than reliance on a few customers. Signed long-term contracts with major clients and a well-maintained client database.
Brand and reputation. Buyers want verification that the business they are considering is well-regarded well known, respected in its market area and business sector and backed by positive customer relations, strong marketing and a positive online presence.
Transferability. Buyers seek assurance that the business can transfer with no obstacles, including transferability of clients, transferability of business capabilities and processes. Transferability of business contracts and transferable long-term leases on facilities and equipment.
Assessing your business as a purchase prospect. Business condition affects pricing and exit timing expectations. To achieve your target price, you may need to extend your exit timing objective to allow for condition and value enhancements before offering your business for sale.
To offer your business as-is or only slightly enhanced condition, you may need to reduce your price expectations before offering it for sale.
As a last resort, a business in high need of improvement and an owner with an urgent exit timing objective may decide to liquidate assets and close rather than attempt to sell the business.
Use the business condition assessment worksheet in the digital toolkit. Your answers to the worksheets yes or no questions will help you assess the sale readiness of your business in each of the 10 areas buyers examine.
It will also help you prior prioritize improvement needs and estimate the time frame required to make improvements.
If you answer yes to all questions on the work sheet, your business is in sale ready condition. If not, if you are like most owners and answer no to some or many questions, you have three exit options:
Make the decision to liquidate assets and close rather than attempt to sell the business, the decision of owners with urgent need for an immediate exit and business conditions in high need of pre-sale improvement.
Make business and value enhancements before offering your business at the price you aim to achieve.
Reduce your price expectations and offer the business in as-is or slightly improved condition, identifying pre-sale improvements to attract buyers and build value.
Two objectives guide pre-sale improvement plans. Enhance strengths that most contribute to the attractiveness and value of your business. Overcome weaknesses that most detract from the attractiveness and value of your business.
To develop sales and profits. Assess how the sales and profits of your business have trended over the past 3 years. Using the sales and profit growth chart in the digital toolkit, analyze whether there are revenue sources that could be developed.
Identify purchase patterns or successful marketing campaigns you may be able to build upon or replicate. Determine if you can reduce cost of sales and therefore increase profit margins.
Reassess pricing, increasing margins or rates on your high-demand unique offerings and adjusting prices. look for areas in your business where you have capacity to grow. Identify which products or services deliver the lowest and highest profit margins.
Develop streams of recurring revenue, automatically repeating sales, or for service businesses, service contracts to strengthen the financial condition of your business.
Work with your management team and accountant to consider the following actions. Optimize accounts receivable by promptly following up with past due invoices. Negotiate terms for accounts payable. Reduce expenses by eliminating unnecessary purchases. Reassess inventory needs. Consider seeking a small business line of credit to preserve cash flow.
To present necessary financial statements for the past 3 years, work with your CPA to prepare the following. An income statement, also called a profit and loss statement. A balance sheet, which presents the financial condition of the business. A seller's discretionary earnings SDE statement, which recasts the income statement into a pro-forma estimate of how much money the business generates annually for the benefit of its owner.
To address unresolved issues that affect the legal condition of your business, Seek legal advice as you examine and plan to address the following issues. Patents that will be part of the business sale must be current. The lease for the business location must be current, assignable and transferable.
The business must be clear of any zoning regulation violations. Any legal claims, incumbrances or leans against the business should be cleared prior to the sale offering. Pending or unresolved lawsuits must be concluded before the sale or disclosed early in the selling process long before due diligence discovery.
If your business has faced or faces employee related issues, be prepared to disclose the problems and outline the steps taken to preclude similar issues in the future. If your business has had regulation or law violations or environmental or safety compliance issues, the expenses will be yours to address.
Be sure all licenses are up to date. Be sure any necessary third-party consents to your sale will be easily obtained.
Use the business sale documentation checklist in the digital toolkit along with advice from your attorney and, broker if you are using one, as you compile the necessary information.
To strengthen the marketing of the products and services of your business, consider the following actions. Be prepared to present how your products and services are decidedly better and preferred when compared to competing options.
Be prepared to present how your products and services are produced using a process that is difficult to copy but easy to adopt and follow.
Review and improve product presentation and packaging to enhance visual appeal and to reduce cost, waste, and environmental impact. Improve and document proprietary production processes. Study online reviews for your business and products.
To strengthen or overcome conditions that weaken your business location, consider the following actions. Consider product revisions to increase appeal. Also consider product and marketing adjustments that attract new customers from the local market, from nearby markets, and from markets that might be served remotely.
If your business relies on the local market for staff and finds employee recruitment increasingly difficult, review the competitiveness of the salaries, benefits, and conditions your business offers.
Consider how you can shift the emphasis of your business and its offerings away from high-risk aspects and toward undamaged niches of the industry. If your business has not adapted to recent industry changes, plan to make necessary adjustments to bring it into alignment with industry standards prior to a sale offering.
If your business location attracts foot traffic, review and update business signage, point of entry and interior, ensuring that it is clean and in condition to make a strong first impression.
To make improvements to the facilities and equipment of your business, consider the following actions. See that all equipment is in good order and ready for presentation, not only through a facility tour, but also in the form of an asset list that itemizes furnishings and equipment.
If equipment is owned rather than leased, confirm that it is owned by the business and not the owner, and that titles are free of leans or incumbrances.
If equipment is leased, review the stipulations, length, and transferability of contracts. See that all manuals, leases, service contracts, and other supporting documents are ready for presentation.
To strengthen the capabilities and processes of your business, consider the following actions. Define the capabilities that most contribute to the success of your business. See that business processes are detailed in process manuals. Write or update your business plan and create a short form version. Write or update your marketing plan and create a short form version.
To strengthen the management and staffing of your business, consider the following actions. Create and train a management team that is committed to the business backed by solid training and transferable employment contracts.
Create employment policies that are outlined in an employee manual or handbook. Create an organization chart or a description of your business organization and structure. Document your personal role and responsibilities in the business.
To strengthen the clientele, client relations and client databases of your business, consider the following actions. Review the condition of your customer database or create one if necessary.
With your attorney, review current client contracts for accuracy and transferability. If necessary, reduce reliance on one or a few clients by developing a broader customer base.
If necessary, reduce the reliance of key customers on your personal presence and interaction
To strengthen the brand and reputation of your business, consider the following actions. See that your website is well-designed, well-optimized for search, quick to load, and owned not by you personally or by its designer, but by the business and therefore transferable as part of the sale.
If you have not done so already, secure your business name with your state's business filing agency, and also secure it online as a domain name and across social media channels. Uniform your business identity across all signage, displays, advertising and sales materials.
Review search results and create a plan for generating positive reviews and publicity, if needed.
Pre-sale business improvements require commitment and confidentiality. Commit the necessary resources and assign tasks, deadlines, and responsibilities.
Share sale intentions only as necessary, and with a strong request for confidentiality to avoid devaluing your business by creating unnecessary staff or customer uncertainty.