2020 Resolution – Prepare Now For A Sale Of Your Business

You’ve worked hard over the years to build your business and you’ve made a positive impact on employees, clients and the community.  As another year begins, it may be time to turn some attention to your exit strategy.  Selling your business can be one of the most significant and complex financial transactions you will ever experience.  If you are within shouting distance of retirement (let’s say within 5 years), then you should resolve to prepare for a sale now.

According to Achim Neumann, President of A Neumann & Associates, LLC, a New Jersey based mergers & acquisitions and business brokerage firm, “whatever the ultimate motivation or timing is for a sale, what is most important is setting the planning into motion with as much lead time as possible – ideally, at least three to five years ahead of the planned transaction.”  With that in mind, let’s discuss some of the things that you can do in 2020 to better prepare for a potential exit from the business.

1. Get Your Financial House in Order. Accurate and dependable financial record keeping is an absolute necessity for a successful sale of the business. If you are not doing so currently, you should be producing internal monthly statements – Balance Sheet, Profit & Loss, Accounts Receivable and Inventory (if applicable).  Moreover, for the Balance Sheet and Profit & Loss, you should get comparative numbers for the same period in the previous year.  If your business is heavily driven by inventory management or a large stable of fixed assets (equipment, vehicles, computerization, etc.), these should be itemized on a regular basis with current values indicated.  If you can’t produce timely and accurate financial reports, then there is no way to properly value the firm, and most definitely no way to sell it at its maximum value.
2. Identify Your Competitive Advantage. What sets your business apart from the competition? What are the elements of your organization that put you in a position to gain market share?  By specifically and thoughtfully stating your “Unique Selling Proposition” (we deliver solution X to target client Y so they receive benefit Z), you provide clarity to your organization’s mission and place in the market.  It is crucial to illustrate those attributes of your business that give you a leg up – among these could be things like employee expertise, defined supplier contracts, protected territories, coveted client relationships, marketing initiatives and advanced technology.  By highlighting these aspects of your business, you are showing a potential investor why they should choose your offering over another.
3. Address Deficiencies and Dependencies. Buyers are looking for “weak links”. As you prepare for a potential sale, it is imperative that you eliminate as many of these as possible.  Typical examples include – too much reliance on the owner for everything, too much revenue concentration with one key client, poor bookkeeping (as outlined above) and sub-par sales/marketing efforts.  Simply put, if the owner is driving all the sales and has all the client relationships or if there is little middle management support for ownership, it will severely reduce the attractiveness and marketability of the firm to the investment community.  On the other hand – if the business is well run with stable management/operating procedures in place and the client base is well diversified, it will be far more attractive to buyers in the marketplace.
4. Outline Your Growth Story. A savvy investor will be looking to take your business to the next level and will want to know your thoughts on how to get it there. Even though, at this stage of the game, you might not be willing to make the types off investment (dollars and time) needed to aggressively grow the business, you should still layout the growth path for a prospective new owner.  New target clients, new territory coverage, additional revenue streams, innovative marketing efforts and new product/service categories – all need to be identified.  Do you have the capacity to double the size of the business and what types of investment will be needed to get there?  The ability to answer that question, will go a long way with an investor.
5. Find Out (for sure) What Your Business is Worth. When it comes to preparing for a sale of the business, guessing the value or relying on risky rules of thumb is a dangerous game. The best solution for this is an “independent and accredited fair-market valuation” of the business performed by an experienced M&A team.  This type of multi-dimensional business evaluation is designed to answer all the key questions that you might have prior to making the decision to sell.  By putting this formal appraisal into place and updating it on a regular basis, you will know exactly what the business is worth, the specific deal structure that is obtainable, the relative marketability of the firm, the tax implications of a sale and the items needed to complete the process in a confidential and expedited manner.  If done correctly, the valuation process will provide peace of mind, maximize the ultimate financial return and lay the foundation for an efficient sale of the business.

While these five items are certainly not comprehensive, they do serve as a good starting point in any meaningful preparation of an exit strategy.  As opposed to real estate, the complex process of selling a business properly takes time, patience and determination.  The sooner you begin taking steps like the ones discussed here, the better off you will be when it comes time to sell or if an opportunity from a suitor presents itself.

As Neumann states, “the key to a smooth and successful business transfer is the owner’s earnest soul-searching well ahead of a sale, considering all aspects and scenarios.  It is far better to be proactive than reactive.  After all, it is your business and you should be in control of the process.”  By resolving to begin preparations now for a potential sale and addressing some of the critical elements outlined above, you will certainly put yourself in a far better position to meet your goals on your terms when the time is right.