Perhaps the most significant transaction faced by any business owner is the sale of his or her business. Inevitably, a variety of factors will play a role both before and after consummating the transaction. Most, if not all, of these factors will have a direct bearing on the success of the adopted exit strategy which will translate into the maximum possible return, or profit, to the seller.
As with many strategic decisions affecting the direction of a business’s “life,” the seller needs to follow a systematic approach to defining and executing the exit strategy. This will greatly help the seller achieve what he or she wishes to achieve from selling the business.
Not Planning Ahead
As Next Avenue notes, a problem that frequently arises, however, is lack of planning. “Planning” translates into “preparation.” Many small business owners begin thinking about selling only a few months before they’re ready to retire. Instead, you should prepare well ahead of the nine to 12 months it typically takes to sell a business. That way, you’ll help ensure the business is ready to sell when you are. Start by defining your personal retirement goals. As you develop your plan, work backward from the date you want to sell, building in conservative, realistic timeframes for milestones between now and the ultimate transaction with a buyer.
Amazingly, nine out of ten business owners don’t have a written, up-to-date exit plan, according to the White Horse Advisors Survey of Closely-Held Business Owners. Lack of planning is the No. 1 reason private business sales fail to meet the owner's’ objectives.
Failing To Use Expert Advice
According to the Small Business Administration, closing a business is a delicate multi-step process. It is highly recommended that you enlist professional help. Expert advice may come from lawyers, accountants, business brokers, auctioneers, tax experts, bankers, and the IRS.
Failing to engage expert advice can easily turn into a disaster. This might be more forgivable in the case of a sale to a family member who has historically been close to the pulse of the business for many years.
But at the end of the day, when the sale is to a non-family member engaging experts is imperative. The seller may be a successful expert at manufacturing widgets, but that doesn’t necessarily translate into being a financial guru who is an expert accountant. Hiring a business broker introduces the expertise of someone who can provide an objective 3rd party viewpoint when it comes to assessing the value of the business. The seller may understandably view his or her business through a prejudiced perspective and assume that the business is worth more than it is. If the business is to be sold, then the valuation of the business has to be realistic.
Selling You, Not Your Business
As this article recommends, it’s about “selling you, not your business.” Next Avenue notes the following: the wealth of information that you’ve accumulated about running your business -- i.e. from the best day of the week to contact suppliers to the employee who trains your new sales associates the fastest -- is an essential part that needs to be transferred to your buyer.
In other words, prospective buyers are looking to buy your business, not you. It is a ruinous mistake to forget this. Do not cut your buyer off from all of the knowledge you have. The more you can transfer to the buyer your knowledge of what’s needed to run the business, the more you’ll get for your company. Most purchasers are looking for a sustainable future stream of income. To convince them of this probability, you need to provide prospects with documented processes and systems explaining how your business would work when you are not there.
And that means that if the documented processes, workflows, policies and procedures do not exist, then start creating them as soon as possible -- long before the anticipated sale date. The existence or non-existence of this information will have a crucial influence on what the business will sell for.