Endorphin Advisors have put together a very brief, but informative introductory presentation on what it takes to sell your business, who the players involved in the process are, and why so many businesses out there simply just don’t ever sell…. -Which we think is tragic considering the untapped market of buyers out there researching entrepreneurship. Let us know what you think in the comments!
Choosing to sell a company can easily be one of the most important decisions a business owner will ever make in their life. That is why it is important to be very prepared to sell your business in order to sell it at the price that it is agreeable to you, the seller. However, preparation starts years in advance. Here are 7 steps to take to ensure your business is ready for sale:
During the due diligence period, the buyer will perform a deep analysis of the company’s financials, dating back at least three years. In effect, the owners of the business must ensure that key accounting and legal matters are up to date and in compliance. Any issues spotted in the financial analysis could lead to a lowering of the asking price due to issues such as tax non compliance or unreported liabilities.
Most companies will have issues on the back burner that have been neglected for some time. Before selling, it is important to take care of those issues sooner rather than later. Depending on the severity of the issue, it is best to create a strategy for resolving the issue to present to the buyer in a proactive manner.
Buyer-Seller Compatibility: There are different types of buyers for different types of business models. Depending on your company’s model, there may be a type of buyer you may want to approach or consider. A financial buyer would like to see free cash flow, upward trending revenues, and a strong core management team. A strategic buyer wants to see a strong, differentiated product/service, market share, brand recognition, and growing profits. An internal buyer wants to see strong financials, positive corporate culture, and diverse product offerings or services. Be sure to also do your own due diligence on the buyer, as they are on your business for sale.
To make your buyer less wary of the selling price, you have to be able to convey the value that your company offers to validate the selling price. In order to do this, create S.M.A.R.T. goals to reach your targets such as improving profits or investing more in R&D to diversify product offerings. This will help deliver the value of your business.
Know Your Industry: Make sure to be aware of your company’s current market, competitors, and driving forces. Consider things such as net tax and the local M&A market for your industry. These will all inform you to be able to calculate a walk-away number that you can be sure of when you sit down to begin negotiations.
Keep The Show Running: Preparing your business for sale is no easy task and definitely will distract you from your daily business operations, especially for small business owners that are operating under several different capacities. The last thing you want is downward trending revenues due to “distractions.” It’s best to assemble a trusted team of professionals including an attorney, an accountant, and a business broker to help coordinate the selling process.
What Now? Make sure to also consider what you will do after the sale has gone through and the business is no longer yours. Will you retire? Join the board of trustees? Buy a new business? Knowing what to do post-sale will help reduce the chance of buyer’s remorse or just plain old boredom. The opportunities are endless!
Selling a company requires considerable forethought and planning in order to walk away with a deal that is most appealing to you, the seller. The best way to learn is by doing, however, learning and making a mistake when selling a business could be costly. It would be beneficial to consult a business broker or intermediary. In the meantime, watch this quick video from Dan Martell to learn invaluable insights on a few tactics to selling your company effectively.
Maybe it was a passing mention that someone was interested in buying your company. Perhaps health concerns have you thinking of an exit. Or is it a nagging feeling that you’re just done? Whatever the reason, if you’re thinking of selling your painting business, know that it’s a journey that’s not for the fainthearted.
About 80% of businesses listed for sale don’t sell, says Peter Holton, managing director with Chicago-based Caber Hill Advisors. Holton oversees Caber Hill’s construction, painting, landscaping, and facilities management division, offering valuation and business consulting insights for those looking to buy or sell service organizations.
“Unrealistic expectations of the business owner are the main reason only 20% of businesses actually sell,” he said. Few business owners truly comprehend the reality check they’ll endure when selling their company. But with a willingness to listen, learn, and correct some deficiencies, it is possible for an owner to make a profitable exit.
IT STARTS WITH YOU
Before selling, you’ll need to tend to your own personal financial and emotional houses, starting with the question: are you financially ready to sell? Be realistic about what you want your retirement to look like. Talk to your spouse and a wealth planner about it, Holton says.
If things look good financially, are you emotionally ready to let go of the company? For those who have been in the business for decades, letting go is harder than they think, according to Holton.
“You strip that owner label off of someone and it’s a scar. It hurts. This is what they’ve done. This is what they’ve built,” he said.
GET REAL ABOUT VALUATION
When it comes to placing a value on your business, expect pain. This is where emotions and all business know-how collide.
“A lot of business owners have never been through a transaction and it’s their baby; their biggest investment in their life. They can always look at it and say, ‘I think it’s worth X,’ but in reality, it is worth Y,” Holton added.
The advisor helps his clients consider the transaction from the buyer’s perspective. “Would you honestly buy your own company for the asking price you want?” he offers.
If the valuation seems low right now, you can make corrections to potentially sell at a later time, says Steven Denny, owner of O’Fallon, MO-based American Business Network, LLC.
“The best time to sell is when you’re riding the hockey stick; when growth really starts to accelerate.” Denny added. “We really love to work with a client who wants to sell in three to five years so we can chart the course to maximize business in that period of time.”
There are many factors to consider when putting a value on a painting company. For Denny, it’s a case of looking at the last three to five years of financials, first. And don’t waste time talking about future projections, he adds.
“Your price rationale is based on past performance. A buyer never buys based on future potential. Unfortunately, sellers often think they do,” Denny said.
For many accountants, the valuation starting point involves looking at a company’s operating performance by calculating its earnings before interest, taxes, depreciation and amortization (EBITDA). For a smaller company, you can calculate the owner’s take-home pay for a year (salary and year-end profit), add in taxes, interest paid on debts, depreciation for assets, and even owner personal expenses paid by the business. It’s not uncommon for some analysts to assign a multiple (usually between one and three) of EBITDA for a valuation, Denny said.
Denny’s company also offers a software product called The Value Builder System to help owners learn about valuation and even how to add value over time to their business.
BEYOND THE NUMBERS
Other factors may help or hinder a business’ value. Expect to hear the following questions from an advisor when dealing with your company valuation:
• What is your role in contracts? Some owners pride themselves in the relationships they’ve developed through the years and the contracts they’ve landed. But if those business deals hinge heavily on the owner being involved, he or she may damage the company’s value, Denny says.
“I often ask, ‘are you the one who has the key relationships with customers or is it the staff?’ If it’s you, then you just handicapped your business,” he added. “This is a difficult concept for solo practitioners to understand.”
If contracts are dependent on the owner’s involvement, Denny encourages them to take the time to restructure the business over the course of a few years, allowing others to control important contracts. Letting go of that control will add value to the company.
• What influence do employees have on business? Look closely at the relationshipsadministrators or supervisors have with customers and contracts. For a high-value, customer-facing employee who an owner knows plays a key role in either production orsales, it may be a good idea to create a uniform agreement with the employee stating he or she will stay with the company for a certain amount of time to help the new owner in the case of a company sale.
That employee may require a higher salary under the agreement, but it could be a short-term expense that’s well worth it if it helps close a deal later, Denny adds.
• How is your business structured? It’s important to operate under a business structure that is easily conveyable, Denny also said. Some older institutions may operate as a C corporation, which is taxed separately from the owners and tends to carry a higher tax burden. Denny advises switching to an S corp status in order to avoid tax penalties, but says it may be a couple years before a sale can occur.
• What is the pool of buyers? If a company is valued at $2 million or more, the buyer pool is greater, as private-equity companies, venture capitalists and corporations tend to look for companies valued at this minimum or higher, Holton noted. That’s not to say that if a company has a lower value it won’t sell, but with fewer buyers, you might expect a potentially longer time frame for a sale.
TENDING TO THE DETAILS
Denny offers a simple, three-step approach to selling a company: valuation, assembling a team, then a ‘get your house in order’ step.
Assembling a team may seem daunting, but it doesn’t need to be. In most cases, a business broker or CPA will quarterback the deal. Denny advises having an experienced transaction attorney, too.
“You’ll have to find one. These are not typically the types of attorneys business owners work with on a day-to-day basis,” Denny added.
Denny’s ‘get your house in order’ step has clients tending to commonly overlooked details like reviewing leases for equipment or real estate. Are they transferable? If not, what needs to be done in order to change that? Any agreements with employees and among owners should also be reviewed, Denny emphasized. In some cases, owners may have lent the company money and there could be outstanding debt that needs to be factored into the valuation
In 1961, Kamal Yadav arrived in the United States with $15 in his pocket. He started Chemco Industries in 1975 and grew the business to $3M in revenue. Chemco sells environmentally-friendly cleaning chemicals, and Kamal’s customers included Walmart, eBay, Amazon, and the federal government.
When his children didn’t express interest in taking over the business, Kamal decided to sell. He hired Certified Value Builder™ Steve Denny of Innovative Business Advisors to help, and they quickly received 14 offers.
Yadav sold Chemco for $3.2M cash upon closing.
In this episode, you’ll learn:
How projecting future profits can increase acquisition offers
What Yadav did to shift from a lifestyle business to a growth-oriented business
The importance of owning the product, rather than just distributing other people’s products
The role recurring revenue plays in the valuation of a company
How to get an all-cash offer for your business and avoid an earn out or vendor take-back
Yadav’s contracts with the U.S. Federal Government created a stable recurring revenue stream that attracted acquirers. Wondering what your recurring revenue stream could be? You’ll find out when you complete the Automatic Customer Builder tool, the foundation of Module 5 of The Value Builder System™. Begin by completing Module 1 for free right now.