1. Get your house in order
Lack of financial preparation is a big hurdle for many small business owners. If you were to put your house on the market, you would spend some time cleaning it up and making it presentable, the same is true for your business. I am not talking about making sure your lobby / entrance, inventory, or shop floor are clean – I am referring to your financials.
All too often I meet with business owners who have out of date financial statements or worse yet, no financial statements at all. They operate their business based on how much cash they have in their bank account. This makes it exceedingly difficult to instill confidence in potential buyers that your business is run profitably. Often, the most important part of due diligence for potential buyers is verifying accuracy and historical trends of your profit and loss statement and other financials. Therefore, the most important part of preparing to sell your business is having accurate, timely and profitable financial statements.
2. Pay more tax
Let’s be honest, if you are a business owner you are comingling funds. I can almost guarantee that you are running personal expenses through your business. That is great, I am all for that as a business owner!
Reporting a lower business income is one of the benefits of being a business owner and our tax code, as owners we should enjoy some perks, but this can be a problem as you approach selling your business. In contrast to publicly traded companies that have a goal to show as much profit as possible, and therefore incur a high tax bill, to show confidence to their stockholders that the company is worth holding on to, small business ownership encourages the exact opposite approach. We want to show as little profit as possible, therefore minimizing our taxable income.
Why does this matter? Because a transaction expert, business appraiser, or the buyer’s lender will come in to establish a valuation or sales price, they are going to use your profit as a major factor in that valuation. Now that you’ve minimized your taxable income, you’ve also just minimized your Business Valuation.
Here is the solution: ensure that any non-business related expenses run through the company are clearly identified on your internal financials. This allows Washington Business Brokers or other experts to “add-back” all the non-business related expenses to your bottom line, therefore increasing your true profit and business value.
3. Clearly articulate what makes your business unique
Can you explain to a potential buyer why and how your business is different than your competition? You should be able to do this without a second thought. Why? Because you should have already identified this a long time ago and built an entire marketing plan and strategy articulating this to your customers.
A new buyer will want to know not only how you acquire new customers but also why you are unique and how you differentiate yourself from your competitors in Bellevue, Everett, or Spokane.
4. Study your competition
While you want to make sure you are unique and different from other competitors in Washington, there is a lot you can learn by being aware of what your competition is doing and why. Are you aware of the sales tactics, marketing, and social media of your competitors? What strengths and weaknesses do they have? Being aware of this not only helps you stay on top and in front of your industry but also gives you ideas for additional products and services that are being underserved in your niche.
5. Be informed on business value / sales price
Do you have a “walk away number” that it would take for you to sell your business or another number in your mind that your business is worth? If so, how did you arrive at that number? Nearly 80% of the time I meet with business owners, that number is not realistic. It’s too high. Business owners are proud of the business they have grown and often overinflate the value in their minds.
A Washington Business Broker will help you with a realistic and accurate value for your business based on an analysis of your financials, competitive positioning, and private market comparables.
6. Willingness to leverage professionals
You are an expert at running your business, but selling a business is likely not your area of expertise. Business owners that try to sell on their own, without professional help, can save on the broker fee but the likelihood of them selling on their own, without any help, is frequently less than 10%. Besides that, a Washington Business Broker can usually help you obtain a high enough price through professional representation that the broker fee isn’t an issue because it’s more than you could get on your own.
It’s very hard to maintain confidentiality if you try to sell on your own, in addition the marketing, discussions with buyers, negotiation, due diligence, and closing all require focus and effort. You have a business to run! Your best path is to continue running the business well and bringing in a market professional to help you achieve your goals.
7. Consider seller financing
In some industries the likelihood of an all-cash offer is not high. All cash offers can also be detrimental to sellers from a tax perspective. Instead of getting a large chunk of change at closing, today’s buyers are more likely to need seller financing to close. Most business acquisitions in Washington require third-party financing, most commonly from the SBA. This type of a loan requires the seller to carry a small note to be paid over time.
60 – 70% of businesses are purchased with seller financing involved, the likelihood of you attracting buyers based on your willingness to carry financing will considerably increase your pool of prospects, and therefore, increase your ultimate selling price.
8. Think through a transition plan
If a new buyer comes into your business, what is the plan to transition them successfully to running and operating the company? Buyers will almost always require a training period where the seller will stay and train the new buyer giving them the experience and confidence needed to take over. Many owners are so focused on selling that they don’t think through this transition.
What is worse, many owners have been operating for so long, they really don’t have any operations manuals or processes in place. Just ‘knowing it off the top of your head’ is a big mistake; how is a new buyer supposed to feel confident they can come into your business if you are not there, and everything depends on you being there because there are no processes, systems, and procedures in place?
Spend time now building your systems, process, and procedures so a new buyer has a clear transition plan.
9. Know your numbers
I saved the best for last; this is by far the biggest struggle for business owners. They are so caught up in the whirlwind of day-to-day operations that they don’t really know their numbers.
Do you know the following?
The average sales value per transaction?
The average number of transactions per customer?
The average number of referrals per customer?
The average lifetime value per customer?
How has your sales cycle / pipeline changed over the last 3 years and why?
What product is most profitable?
What marketing and client acquisition channel is most profitable?
I could go on asking different questions that you should and must know. Knowing these things shows the potential buyer you run your business like a business and make informed decisions, not emotional reactions.
At Washington Business Brokers we are experts in valuation, optimizing a business for sale, buyer identification and qualification, negotiation, deal structuring, and closing. Our strategic advisor, Glen Cooper, has sold 500+ businesses in his career and is a nationally recognized author and trainer in selling private businesses.
We do not sell you on selling your business or buying one. Instead, we listen, provide options and expertise, and ultimately partner with you to accomplish your goals.
If you would like to better understand the value of your business or learn more about the process of confidentially selling:
call or text 937.344.8750
email [email protected]
or schedule time for an exploratory chat at calendly.com/ryanhemmert