From the creation of a business, a business owner should be thinking of the exit strategy. Preparing a business for sale — whether to a family member or complete stranger — shouldn’t take place when the owner decides retirement is in the near future. Plans to sell a business should begin the day the doors open.
There are five things an owner needs to check off the list before a business is ready for sale. But first, a quick test: Can the owner leave on vacation for a month and the business run smoothly, without any hiccups? The employees left to operate the business should be able to provide the owner with a one-page report regarding the business during that time.
If the answer is “no” to the above, then the owner can revisit the following checklist to help prepare.
• Clean financials: Keeping clean books is the foundation of any business, and when it’s up for sale, it’s the first thing potential buyers look at to establish business stability, value and future growth potential. A business should have three to five years of clean financial statements, with tax returns to match, preferably trending upward.
• Leadership team: A business is only as good as the team that leads it. Is there a steady, knowledgeable team in place to operate the business while the owner is on a monthlong vacation? Potential buyers want to know a business can be successful with the current team. A good team can be a bargaining chip in a sale, and stay on after the transition, especially if it provides intangible assets, such as knowledge, creativity, expertise and processes.
• Minimize risk: During the creation of a business’ strategic plan, strengths, weaknesses, opportunities and threats were identified. And although this analysis is important to the creation of a business, it’s also integral to the sale. Risks can be anything from customer concentration, cybersecurity, improper branding, supplier, vendor, legal or employee issues. They can all play into the value of the sale. New buyers don’t want to inherit problems, so taking a hard look at the business, including the risks and weaknesses, and fixing those problems will only help increase the value and price point of the sale. You can’t just tell the potential buyer that a particular issue can be fixed later; if so, a price discount for any outstanding risks would be negotiated.
• Determine the most valuable part of the business: Intangible assets can’t be easily replaced or purchased. A good team, with everything stated above, can be one of those valuable intangible assets. Looking at the company as a whole, a creative culture, streamlined workflow processes and methodology can be highly valuable to potential buyers, if it helps the company function and be successful on a higher level. Providing potential buyers with assets they can’t purchase anywhere else increases the strength and thereby price point of a business sale.
• Is the owner personally ready? This is a loaded question, as an owner may or may not be ready before any of the above has been met. However, if all items have been checked off this list, and the owner is able to go on vacation without a hitch, the following is important: Is the owner financially, psychologically and emotionally ready to sell the business? Will the sale of the business financially provide him or her with enough to be comfortably sustained throughout the next phase of life? The owner needs to know what is financially needed to either retire, purchase another business or whatever the next stage holds.
A business plan helps set the course for the beginning stages of a business, and its strategic plan gives it a map for increments of growth. The sale of a business — essentially the third stage of a business’s life — requires the same amount of planning. If there isn’t a plan, the business isn’t ready for sale. If the owner doesn’t have a plan, the deal will fall apart.
Chuck Mohler owns Eagle Corporate Advisors.
This story originally appeared in the Las Vegas Weekly.
Business owners commonly ask themselves, “What is my business worth?” In a perfect world, they would already know. In truth, it’s a complex answer to a relatively simple question.
In the next dozen years, approximately 250,000 business owners in the United States will try to exit. Only 50,000 will be deemed market-ready. Of those, 30,000 will go through with the transaction, 16,000 of which will sell with concessions and 14,000 at the owner’s desired value. The success rate of these attempts is forecasted at 5 percent.
The reason? Business owners weren’t proactive and didn’t understand the importance of tracking their valuation, a financial blueprint of a business’s worth.
Valuations should be done annually. As with many tasks in business, it’s easier to maintain once initiated the first time.
Business owners need to understand that a business valuation varies based on purpose. Different purposes will cause different values. Reasons to seek a business valuation include establishing a baseline — where am I? — or an exit strategy that includes selling the business, transitioning to another co-owner, keeping the business in the family, or during the estate-planning process. A valuation also can be a valuable, ongoing business decision tool for diversifying risk, borrowing money or planning to grow the business.
It is crucial to step outside of the business and look back at the whole picture from a third-party perspective to examine how the value of the business will affect the rest of the business owner’s life. Many times, business owners are working in their business instead of working on their business.
The valuation process consists of determining the purpose for the valuation and standard of value; conducting a financial, economic and industry analysis; and finally, determining a valuation using the various approaches of cost, market or income before a range of values becomes apparent. In short, it’s an intimate look at the business behind the curtain — including finding the company’s weak links — and a detailed look at the books. In this case, an independent, certified valuator — not the company CPA or lawyer — should complete a valuation.
It may sound scary and a bit invasive, but there are big benefits to completing a business assessment and evaluation beyond just peace of mind and a good gauge as to where a business stands. A valuation allows business owners to assess and thereby reduce risks, align their team, enhance access to capital, achieve goals, and become more effective, controllable, predictable and sustainable when improvements are implemented to increase the value.
Like a solid business plan, a complete business assessment and evaluation is a roadmap to success. It allows business owners to know where they are and, more importantly, where they can go.
Chuck Mohler is the owner of Eagle Corporate Advisors.