Business owners spend years – in some cases, generations – operating their businesses as successfully as possible. However, many fail to properly plan when it comes time to sell. Instead of making certain their companies are well-positioned to receive the best price, they respond prematurely to a potential buyer’s direct solicitation. Planning for a sale can mean the difference between selling for top dollar and not completing a transaction at all.
Answering the following five questions will help you determine if your business is saleable.
Is my business over dependent on me, the owner-operator? Buyers are primarily interested in acquiring a business whose success is not dependent on the owner’s day-to-day involvement and relationships. A saleable business almost always has a leadership team that can run the business and make decisions without the owner. If you have sleepless nights when you’re on vacation because you are concerned that your business may not operate efficiently, you may not have a saleable business.
Is my business suffering from client concentration? Reliance on one major client is a common occurrence. How can you gauge if your business suffers from client dependence risk? The real question to ask is whether the loss of one client will be detrimental to your business. Start raising a cautionary yellow flag if you have one client growing rapidly as a percentage of your company’s revenues. If your largest client(s) represent less than 10% of revenues (or profits), you’re in good shape. Between 10-20%, you’re starting to have a customer concentration issue. If a single customer comprises 20 to 25% of your business or more, you definitely have a customer concentration issue that might make the business unsaleable to particular buyers.
Do I have realistic price expectations? To be considered a saleable business, an owner must have realistic expectations as to the value of his/her business. Too many owners try to sell their company with unrealistic price expectations and no understanding of how a deal might be structured. It’s imperative to know the realistic value of your business and set expectations accordingly before attempting to sell.
Will the buyer detect window dressing? Putting a fresh coat of paint on a house before it goes up for sale is a good idea; however, a lot more preparation is required when it comes to selling a business for maximum price. Experienced owners can reduce expenses to increase profits, but doing so may have negative repercussions on a business long term. Properly preparing for sale takes time and should not be rushed.
Do my financial statements engender confidence or doubt? If your business has a consistent habit of strong record keeping and produces meaningful financial statements, it’s a huge contributor to a successful sale. Buyers seek businesses that engender confidence. Inadequate financial records create uncertainty and doubt. Once skepticism and distrust arise in a buyer’s mind, a successful sale transaction is highly unlikely.
Be sure your business is saleable by identifying and addressing value detractors in advance of interacting with a prospective buyer. Failing to plan for a sale is a plan for failure.