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Learn More about farm loansChange is an inevitable aspect of every life cycle. With business, the final evolution can take a variety of forms. You may be ready to retire and pass the business on to a family member. Perhaps your goal is to sell to outside investors and use the proceeds as a retirement nest egg. Or the business may have declined so much that the best exit is a legal dissolution of your company. These tools and resources will help you manage the big decisions ahead for a successful transition.
It is important to start organizing your business for sale as early as possible, three to five years in advance if possible. Unfortunately, most entrepreneurs begin to think about selling their business during economic downturns which is the absolute worst time to sell. As we previously discussed, most business valuation models are based on a company’s profitability or free cash flow. You want to sell your business when sales and profits are trending up and when there is also a track record of good profits to maximize the value of your company.
The following are a few suggestions to consider if you want to maximize the sales price of your business when the time comes to sell it.
Long before you actually put your business on the market, you should get expert advice to prepare you for the process that will follow. You should discuss the following topics with your advisors to prepare you and your business for the upcoming sales process.
In preparing for the sale, also ask each of these individuals to note any weaknesses in your business and possible ways to improve the business prior to its sale. Addressing these problems before potential buyers enter the due diligence process will make the sales process go more smoothly.
Another step you should take with your advisors is to begin accumulating a list of potential buyers. These buyers should be grouped by the reason for their interest in your company. Once you have the potential buyers grouped together, begin to list what they would want out of the company.
Just as you would do if you were going to prepare your home before putting it on the market, you should give your business a makeover to create the best possible first impression to potential buyers.
When potential buyers visit your locations for the first time, do they see order or chaos? When a potential buyer’s first impression of a business is orderly and well run, they will often assume that the management and administrative office of the company are efficiently managed as well.
Some things you should consider doing before putting your business up for sale would include freshening up an old looking store front, unloading obsolete inventory sitting around, brightening up the lighting and organizing your premises so that it is immaculately clean and orderly. You should also consider updating your signage and marketing materials.
Something that is often overlooked when trying to improve the buyer’s first impression is the personnel they will meet on a visit. Are all of the employees friendly and customer focused or are they sarcastic and abrasive? It may be time to make a few personnel changes also.
Any prospective buyers for your business will value it more highly if they are confident that it will continue to grow and remain profitable. They will want to know why they should invest in your business rather than one of your competitors.
You should be prepared to discuss your competitive advantages in detail. This discussion will normally include your unique selling propositions, target markets, intellectual property protection that would limit competition, restrictive agreements with suppliers, long-term agreements with customers and your approach to marketing the business.
In addition to analyzing your competitive advantage, consider completing a SWOT analysis on your primary competitors. By listing the strengths, weaknesses, opportunities and threat of your primary competitors, you will reinforce your knowledge of the market and create confidence in the bidder looking at your market analysis.
To assist in maximizing the sales price for your business, you should also consider getting testimonials from existing customers explaining why they selected your company over competitors.
Taking on a new business is a daunting task. There is a lot to learn and remember in a short period of time. To convince the potential buyers that the transition will run smoothly, prepare operations manuals for all departments of the company. These operating manuals should include all policies and procedures and a description of the departmental work flow.
These operating manuals should include:
Very often when an entrepreneur begins writing down all of their policies and procedures, they will find that there are things that they and their staff are doing that are unnecessary and a waste of time. Improving these processes often results in the company becoming more profitable.
These operating manuals should be sufficiently detailed so that someone could use them to open a franchise of your business. These operations manuals will make the purchase of your company a turn-key purchase and will increase the value to an acquirer.
The two primary drivers in determining the business valuation models are sales and profitability or cash flow. Obviously, anything you can do to increase these numbers will increase the appraised value of your company. If you are planning to put your company on the market within the next six months, there is very little you can do to improve the financials in a meaningful way to impact the appraised value. However, if you have two to three years, you can have an impact on the financial evaluation of your company.
Consider the following steps to improve the financial position of your company.
If real estate is a significant asset in your company, consider spinning it off into another company. This will significantly reduce the purchase price of the business and increase the pool of potential buyers. The real estate can either be kept as an investment by the entrepreneur to help fund their retirement, or it can be sold to investors looking for passive income. Nearly everywhere you go, there are investors that are looking for rental real estate with tenants in place and under contract.
Buying a business is a stressful process. Buyers are never certain if what they think they are getting is what they are actually getting. Anything that you can do to reassure them will make the process go smoothly.
The following are areas the buyer will want assurance on during the due diligence process.
Getting the best price for your business requires planning and taking action in advance of actually putting the business up for sale. Create an action plan of steps to make your business more attractive to potential buyers and assign responsibility for their completion. Buyers will be looking for strong cash flow, the potential to grow the business and as little risk as possible.
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