Every company has a natural life cycle. While the name on the business may remain the same, the philosophy, goals, and objectives change as the ownership changes. Unfortunately, many owners unwittingly sabotage the value of their business by failing to plan for its eventual sale far in advance.
Selling your business may be the farthest thing from your mind right now, but time waits for no one. At some point, your company will be passed on to the next generation, closed or sold. If you envision selling anytime in the future, it’s important to avoid some common pitfalls that undermine the value of your business during negotiations.
Failing to Train Your Replacement: Many companies are run by an owner/operator. From a buyer’s perspective, this is a significant weakness. While you may experience a sense of satisfaction knowing your business can’t operate without you, it will severely diminish its value to a buyer. To enhance intrinsic value and ensure all your employees’ jobs are secure, train a key member of your team to handle every phase of the operations side of your business in your absence.
Failing to Diversify: Many business owners rarely venture outside of their comfort zone when pursuing business opportunities. While it’s easy to ignore other revenue sources when the business is making money, a lack of diversity can negatively impact the worth of your company. Diversity provides protection from economic downturns, and buyers value companies that aren’t dependent on a single source of revenue.
Failing to Keep Accurate Financials: Buyers will always ask to see five years of tax returns and five years of financial statements. If your financials aren’t in order, the buyer has nothing to use as a basis for establishing the worth of the business. This is especially true if you’re asking for “goodwill” compensation. Inaccurate or missing financials also affect your credibility from the buyer’s perspective. Without an accurate and complete set of financials, you should expect a significantly lower offer.
Failing to Develop a 5-year Plan: Always anticipate that a buyer knows nothing about your industry. A well-conceived 5-year plan offers a valuable blueprint the prospective buyer can use to guide the business going forward. If you don’t end up selling, the exercise itself has intrinsic value for charting a course into the future.
Failing to Establish Authentic Receivables: Too many small business owners tend to ignore past due receivables until they turn into bad debts. Savvy buyers won’t be fooled into paying for debts that are over 90 days old. A healthy days-to-collect average of less than 45 shows a buyer that your receivables and customers are legitimate.
Failing to Ensure Your “Team” Remains Intact: Long before you’re ready to sell, it’s important to lay the groundwork with your business partners. This includes key employees, suppliers, and professional team. If you want to sell your business for the highest price, eliminate the uncertainty. When your entire team is committed to working with the new owner, that confidence will be reflected in the offer you receive.
Plan for the Sale of Your Business
Most companies are small, private family-owned businesses. There are far too many heartbreaking stories of companies sold at fire-sale prices (or not sold at all) because of sudden illness, death or retirement. If you fail to plan for the sale of your business years before you’re ready to sell, you’re almost guaranteed to receive a lower offer. Many small business buyers are professionals, and they love a distressed sale. You’ve spent a lifetime building equity into your business, so don’t let it slip away due to poor planning. Take the time to develop a strategy for selling your business to benefit yourself and your family.