Low Risk Equals High Returns on Sale of Business
December 21, 2016 in Selling a Business
Businesses need to be well-oiled machines to make a splash on the market. Buyers want to acquire a business in its prime, something that looks like it is on the way up. To achieve this, the business needs to be turnkey with minimal risk.
Working with exiting business owners, our team at Exit Consulting Group continually sees the reverse play out when owners start to transition out. Rather than finishing with zeal, they want to start petering out or slowing down. It’s similar to a homeowner who has grown accustomed to the squeaky door or window that only opens in summer. Owners just let it slide.
Squeaky doors or rusted gates create risk in the eyes of the buyer. They mean work. The more you want a buyer to invest into the purchase of a business, the more stable and in top shape it needs to be. The more risk the business has, the less a buyer will be willing to invest into it.
Here are the four key areas to evaluate risk when preparing to sell your business.
Product or Service Concentration
Part of running a stable business hinges on diversifying your income sources. When you put all your eggs into one basket, a single incident can scramble the entire revenue system. Incoming buyers don’t want the risk of a single basket. They want to have multiple revenue streams. Each revenue entity needs to be a small enough percentage that if the market shifted or a competitor beats them out, the entire business doesn’t go under. If a single product or widget makes up over 50% of your revenue, it’s time to start undergoing product development or increasing marketing on other products. If it’s a service-based business, apply the same concept to customer concentration.
Bottom line, it’s time to diversify.
After reviewing your revenue streams, turn your focus to internal systems. For a buyer, the longer an employee has worked in the business, the better for the future success of the business.
Take a CFO who has been there for ten years. They know the entire background history of the company. Especially when it comes to larger businesses, you could almost say they know where the bodies are buried. With them at the helm of the financials, a new owner can rest easy. If the CFO hints at a nearing retirement, they create an endless series of hurdles for an incoming business owner. This is the same for every senior management position. Walking into the boardroom with fifteen brand new employees makes for a rocky transition.
Instead, create the position where the business practically runs itself. The goal is to achieve a turnkey business. That’s a drastically different proposition.
Your business has to have clean books. There’s no way around it. More often than not, it’s issues with books and finances that cause a deal to fall apart. When buyers submit messy books to the bank, lenders don’t want to approve loans. It doesn’t signify a stable company. And when tax records don’t match corporate finances it looks like something funny has been going on behind the scenes. This makes buyers and lenders wary.
Wary parties make for a lower offering price.
To successfully present the financials of your company, you need to have three to five years worth of books that are clean. Additionally, this is the time frame that you need to showcase the revenue potential of the company, not the ability to write off massive amounts of expenses.
Legal Aspects of Corporation
Where are your corporate documents? What do the bylaws state about selling your company?
Business owners form a corporation or legal entity when opening their business. They get a social security number for the business, pay taxes and have incorporation records. But as time passes, these corporate and legal documents go into a file to be lost in a sea of other records. To legally sell your business, you need to present the stock certificate giving you permission to do so as well as follow the bylaws. That means resurrecting the legal documents you used to start the business.
The other legal aspect means addressing any pending litigation prior to going to market.
Preparing Your Business for Market
Getting a business market ready is a very different skillset from creating and growing a business. That’s why it’s essential to partner with a team that can successfully walk you through this complex transaction. We evaluate every area of your business to reduce risk, which creates high value rewards when it comes to closing the deal. The lower the risk, the higher the asking price.
Most business owners thrive in an environment where they test out theories, learn from failure and come out stronger. When approaching the sale of your business, however, you don’t have the luxury of learning from mistakes. You will sell this business once – and you want to get it right.
If you’re looking to start preparing your business for an upcoming sale, partner with a team of experts who specialize in transitioning businesses. At Exit Consulting Group, we help mid-sized to large companies navigate every step from planning an exit strategy to preparing the business to overseeing the transaction to helping with the transition.
Contact us today to see how we can help you minimize risk in your business.