As every entrepreneur knows, selling a business is a big event, a milestone toward the next phase of life. The majority of business sales are triggered by unexpected events in the owner’s lives. If you’re not prepared to sell, it is more likely that your transaction will be at a greater disadvantage, potentially reducing your overall valuation or causing a more problematic sale. It is very easy to get caught up in the daily business operations, leaving you more vulnerable should an unexpected event occur. Plan ahead with an exit strategy.
Planning Ahead: A Business Value Insurance Policy
Business owners buy insurance in hopes that they don’t need it, but when they do need it, they are very happy they have it. Often the insurance is for events that might cost them as little as $1,000. Being prepared to sell your business when you’re not planning to sell is like having a “Business Value” insurance policy. Without preparation (your insurance) you are “uninsured” for the loss of business value, which can cost hundreds of thousands of $$ or more.
1) Financial Statements.
Make certain your financial statements for at least 3 years are accurate, accounting practices are consistently applied year-to-year and all of the assets and liabilities on the balance sheet are accurate. Here’s a good guide to what’s important in your business accounting.
2) Dispose of unused equipment.
Scrap or auction it, but get rid of it. You’re selling a business, no need to have useless equipment lying around.
3) Clean out dead or slow moving inventory.
Business owners often think that obsolete inventory doesn’t cost anything to keep on hand and maybe one day you’ll get a call from a customer needing that exact item. Get an accurate count of all your inventory, then get rid of the slow-moving or stagnant items.
4) Make sure your employment practices are documented and applied properly.
Is overtime being paid properly? Are your 1099 independent contractors classified properly? Have your employees been screened appropriately for their jobs?
5) Check your books.
Make sure the expenses recorded on your financials are all legitimate business expenses. The cleaner the books the higher the price.
6) Clean up any old partnership or ownership issues.
7) Make sure your tax payments are all up-to-date. Sales tax, FICA, etc.
8) Get an appraisal.
Have a business valuation or business appraisal done on the business so you can determine if the value of the business is adequate to provide the cash needed to secure your future.
9) Talk to your accountant.
Look at your corporate structure and determine what tax issues will need to be resolved to maximize the after-tax proceeds in a sale. Are you still a C Corp? If so, talk to your accountant to see if changing to an S Corp would benefit you in a sale.
Reduce the Risk
Why do these things increase the value of the business? Because they reduce the risk to a buyer of a business. The lower risk for the buyer, the higher price a seller can expect. In my 20 years managing business sales, I have found that the most successful business sales are completed because a business owner was PREPARED to sell when the opportunity arose.