By Ben Kinsey, CPA
|Image courtesy of flickr|
That’s right, it takes time and lots of it to properly position a business for sale. All too many business owners put off thinking about selling their business until the last minute. This can be a huge mistake. Selling a business definitely isn’t an afterthought. It’s also not something to attempt out of fear. What I mean by that is if your business has been on a roll for the past few years and your only motivation to sell is to try to strike while the market is hot, this is a mistake. Selling a business simply because the economy is good is no way to get top dollar.
Even worse is setting your expectations too high. Just because a business broker or another business owner tells you your business could command a million dollars if you sold now, that doesn’t mean that’s what your business is really worth. More importantly, there are a number of factors that could either reduce the perceived value of your business or even derail a sale.
Do You Plan to Sell?
|Image courtesy of Max Pixel|
If you want your plan to work, you have to factor in a number of parties:
1. You have to deal with the banker
2. You have to deal with the accountant
3. You have to deal with the broker
4. Then you have to deal with the buyer
God forbid you go to the SBA to try to get a loan when you are unprepared, or have an independent accountant look through your books. You could suddenly find your business isn’t worth what you thought it was worth. Just because you make $200,000 a year doesn’t mean a buyer is going to give you $1,000,000.
On the other hand, even if your business is wildly profitable, it could still prove unsellable if it can’t operate without you. A buyer doesn’t want to acquire a business that requires the owner to work 80-hours a week. On top of that, if your business can’t operate without you, then you don’t have a sellable business, since it would take two people to replace you. No buyer wants to be saddled with a bigger payroll without being able to increase the bottom line. That’s a deal killer. Being able to service the debt load is a make or break figure when it comes to selling a business.
The process required to prepare a business for sale takes a lot of time. There are also several prerequisites, including:
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2. You need to have an incentive plan that will keep your current employees in place. The last thing a new owner wants to find out is that one or more of your key employees isn’t going to be there 6-months to a year from now.
3. Cash-flow is king. If you don’t have enough cash-flow to service the debt and pay the new owner a substantial salary, you’re not for sale.
4. You can’t sell a business without healthy tax returns. The bank won’t talk to you if your business shows a tiny profit or even worse a loss during the past couple of years.
5. Your business can’t have any liens against it. Nobody is going to buy your business or lend you money if you have a federal tax lien or an unsettled debt on a credit card. I’ve seen deals blow up at the last minute because the underwriters get cold feet after discovering some old debt that wasn’t paid in the past
|Image courtesy Max Pixel|
7. You can’t sell a business simply because you’re burned out. A burnt-out business owner doesn’t present themselves or their business well. Burn out can kill a sale.
8. A shotgun sale where you’re selling the business to get out from under the debt load isn’t going to work for either you or a potential buyer. Nobody wants to buy a business from an owner whose only motivation is to build a business, get a check and leave.
9. Do you have a business or a job? If you haven’t taken a vacation in years because the business can’t function without you, you don’t have a sellable business. You have a glorified job. If you are the only person in the business who can make decisions, you don’t really have a business. If you have to jump on the truck as well as book the sale, nobody is going to want to pay you to take over your position. If you can’t walk away from your business for 2-3 weeks without feeling confident that your business will be in as good or better shape then when you left, you don’t have a sellable business.
Far from discouraging business owners from selling their business, I believe this should be one of the prime reasons to start a business in the first place. That being said, if you want to eventually sell your business for top dollar, you need to be prepared to take the time to make sure that the business is profitable and that all the systems, personnel and processes are in place to seal the deal.
Ben Kinsey, CPA of Small Business Group works with owners of closely held corporations in the Northeast Florida region. If you work in the North Florida area we offer a FREE initial Consultation at our office, please contact Small Business Group if you would like to know more about strategies for your business.