We have all heard that small businesses are the backbone of the U.S. economy, and according to Townsquared Resources there are 28 million small businesses in the United States (2016). A small business is defined by the Small Business Administration as one that has fewer than 500 employees. To help us better appreciate how substantial this number is there are 18,500 large companies in the U.S. That’s 28,000,000 vs. 18,500, and when one of these 28 million businesses is in the market to sell, they can’t just hang a “For Sale” sign in the window and get the best price—they have to be prepared.
As a small business owner every decision is approached with careful thought and consideration. One of the biggest decisions a business owner could make is to sell that business. Only through strategic planning and preparation will they be able to get the most value from the selling of probably their largest asset—their company. Here is some helpful information that can make the process a bit easier.
Get Started Early
Selling a business can take years of preparation and is often connected to the business owner’s personal financial and estate plan.
Shape Up Those Numbers
Buyers will want to see financial statements. Make sure that files are in order and checked frequently, note special clauses such as a “change of control” that could affect a sale. If the business has more than $5 million in revenue, the last two years of financial statements should be audited. Smaller companies should have financials reviewed by a reputable accounting firm. This will ensure that weaknesses in operations/controls are addressed and there is time to correct issues.
Identify Potential Buyers Now
Potential buyers can be members of the management team, co-owners, key employees, family members, competitors and vendors. Identifying a buyer early allows the business owner to plan for succession and continued growth since the owner cannot always predict when he or she needs to sell due to unforeseen circumstances.
Get Professional Help
Working with the right team of advisors is crucial so that issues with financial planning, insurance, retirement, accounting, taxes, mergers and acquisitions, legal, etc., can be addressed. Create relationships with professionals today who can bring their own expertise and perspective from their respective areas. Having a professional team in place before selling will give sellers the necessary insight and knowledge to maximize business value.
Have a Business Succession Plan
Have a business succession plan in place to ensure continuity of the business in the event of an unfortunate incident like the death, sickness or injury of a business owner. Have buy-sell agreements prepared if potential buyers have already been identified. Implementing business continuation strategies of this nature requires professional help now rather than later.
Have a Strong Management Team in Place
Key personnel should be ready and prepared to support the new owner to ensure a smooth transition. Put in place incentives, such as executive benefits or a sale bonus today to avoid last-minute power plays and conflicts.
Key Equipment and Facilities Should Be Kept Up to Date
For maximum value a new owner should be able to step in without worrying about shelling out additional money for unforeseen expenses. Sellers should not be giving potential buyers the opportunity to make a low-ball offer due to old equipment or outdated processes. The seller doesn’t have to go overboard in making changes all at once but should be making improvements over time to maintain assets.
Cut Those Business Expenses
Pinpoint and address unnecessary expenses wherever possible. Doing this a couple of years before selling a business will help a business show as much profit as possible. The tax write-off for expenses will be lost but that will be made up through the increased sales price.
Future Growth Plan
It is critical to show that the business still has growth potential so being able to show the continuation of significant growth after the sale is important. Items such as renewed contracts, strong order pipelines and business plans for the future will help immensely. Sometimes sellers of professional services companies might be asked to stay on temporarily after a sale has been made. Particularly in these practices buyers are concerned that existing client relationships can wither away once ownership changes, affecting the value of the newly acquired business.
Talk to your financial advisor to get the process rolling to prepare your business so that it can be sold on your terms when you’re ready.