By David J. Nissen, CPA/ABV, CVA, Managing Director
If you have ever sold a vehicle you know that your goal is to get the most money you can out of the deal. Back in the day, before online sales, there were some tried and true actions that helped one maximize the price you received if you chose to take it. You could sell your car “As Is” or you could take some actions that would help you get the price you think the car was worth and maybe more.
When selling your business, you have similar options. But, to maximize price, you have to fix it up or prepare it. Buyers of a business pay for future expectations such as above average operating performance, anticipation of stable earnings based on history, capacity to support additional sales, a smooth transition, and manageable risk.
Wash the Car
The important first step when contemplating the sale of your business is to clean up your Balance Sheet:
- Accounts receivable, accounts payable, inventory, deferred expenses
- Eliminate related party debt
- Eliminate non-operating assets and liabilities
- Insure for contingent liabilities
Further clean-up is still needed though. Now, concentrate on your Income Statement:
- Remove phantom employees
- Eliminate discretionary expenses
- Competitively price rent and related party transactions
Fix Dents and Then Paint
- Clean up facility, equipment and production process
- Add needed capital equipment/capacity
- Re-balance debt
- Settle/insure contingent liabilities
- Provide financial projections for next 3-5 years
- Include capital expenditures and financing needs
- Tie profit plan to current budget
Wax and Polish
Manage the financial results of your business to:
- Demonstrate predictable results ‒ be able to show your desirable sales performance as compared to your actual performance historically
- Show above average performance
Provide a Warranty
Growth projections: It is helpful to show the buyer a projection of your sales out 3-5 years and provide a solid marketing plan based on market research. Communicate your marketing and business development to staff and ensure that you have adequate staff to implement the plan.
Monthly budgets with variance tracking: It is important to have budgets in place, monitor them on a regular basis, and provide clarity as to why there are changes. This will showcase the management process and the reliability of it.
In place transition plan: Planning for change and anticipating transition needs is key. A business that has cross trained staff, has up-to-date and comprehensive client information, and offers transition training is very desirable. Furthermore, offering a non-compete where appropriate may be the item that moves a buyer closer to signing.
Consider earn-out incentive: An earnout is a contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings. Such a contract:
- Aligns seller and buyer incentives
- Provides assurance for proposed profit plan
- Allows a higher sales price
After you prepare your business for a sale, you may experience a similar feeling if you ever stepped back to look at your car before you hand over the keys; you might even have doubts about why you are selling. If it’s the right time to sell and you prepared your business accordingly, you will soon be looking to a better future.
We have deep experience in assisting owners sell their business. For more information contact:
David J. Nissen, CPA, ABV, CVA