If you’re considering selling your business – and want the best offer – the time to start preparing is now. There is a lot of work that goes into a successful sale, and we can help.
This post will review the steps you should take to prepare your business for a sale, and our next post will review the steps you should take to actually promote and finalize a sale.
Step 1 – Know Your Financials
First, you need to understand the true range of value for your business. The market value of a small-to-mid-size business can actually vary greatly from the book or tax-mitigated value because these businesses are usually managed to minimize taxable income. While this benefits the current owner, the cash flow will look less appealing to a potential buyer, so you should perform a financial recast to calculate the true earnings.
We recommend recasting your business to EBITDA. This recasting process will provide buyers with an income amount more reflective of true earnings. The easiest way to think about the recasting process is to consider this as a way of demonstrating the financial results of the business “as if” it were owned by the buyer (taking into account tax-motivated or other discretionary transactions that reduce corporate earnings). For more on this process, see our blog post.
You will also want to understand your working capital situation. In the simplest terms, working capital can be defined as current assets minus current liabilities, but ultimately it is the amount of operating liquidity or cash available to a business at a given point in time. Working capital is an essential part of the day-to-day operations of a business and is just as important as employees and physical assets. For more on working capital, see our related blog post.
Step 2 – Know Your Strengths
Next, you’ll want to know your strengths. To a buyer, strengths include:
- Strong EBITDA margins
- A good multi-year EBITDA trend
- No customer or vendor concentration. Rather than having a large concentration of customers and vendors in one industry/area, a well-diversified set of customers and vendors means less risk for the next owner. A buyer wouldn’t want “all of his eggs in one basket,” so to speak.
- Just remember, “the lower the risk, the higher the valuation”
Step 3 – Know Your Weaknesses
After thinking through your strengths, think of the opposite. Anticipate which weaknesses a buyer or their advisor would bring up, and make any adjustments to mitigate these areas.
Ultimately you need to contemplate how you tell the story of your business and how you operate your business, which are critical considerations for a potential buyer.
Step 4 – Know Your Target Audience
Should you sell to someone within your family? How about a private equity firm? How do you choose? This, of course, can be stressful, especially if there is pressure to keep the company within your family. While the selling process differs with every company, the types of buyers present usually remain consistent, and there are pros and cons to each option.
To better understand the implications of who you should sell your business to, reference our blog post.
Step 5 – Know the Next Steps
Now that you understand the steps required to prepare your business for a sale, it is time to review the steps for actually going to market and selling your business.
Our next blog post will review the 10 steps to selling your business. We’ll review the due diligence process (it typically worse than you can imagine), the overall process (be prepared for the deal to “die” three times before it finally closes), and which marketing materials will show your business in the best light. Be sure to check back for that post in a couple of weeks!
Starting a new business is an uphill battle – there are many things to consider: who your target audience is, whether or not you want to enter into a partnership with another person or business owner, how many years you plan on being in the industry, etc. With so many decisions to make, it’s understandable that some things fall through the cracks. However, you don’t want to overlook the negative effect credit mistakes can have on your company. Not only do these mistakes have the potential to be detrimental to your company’s success, but they can also become a personal financial burden.
Symmetrical Investments is here to help you! The first step is to understand common credit mistakes so that you can prevent them before they affect your business. Keep an eye out for these common financial faults, in order to keep your company stable both now and in the future.
Failing to keep financial data
Keeping track of all of your financial transactions is crucial to staying on top of your expenses. While you may be tempted to unclutter your desk by tossing away receipts and other paperwork, make sure you are retaining this information for future record. Using online record-keeping software that files your receipts digitally could save you from losing key information, all while keeping your desk organized.
Intertwining personal and business finances
Especially if you’re a small to mid-size business, it is easy to fall victim to combining your personal and business expenses, but this decision can become sticky when tax season rolls around. Think of your business as a viable entity – create a separate checking account, use a business credit card, and consider establishing a limited liability company (LLC) or an S Corp for your business.
Late payments
Companies have to pay out certain things on a regular basis – inventory, employees, software licenses, and other expenditures. Businesses who get in the tendency of paying these late have a higher chance of failure. Keeping cash gaps as short as possible is crucial to avoid having to take out loans and debt that eat into profit.
Focusing only on short-term
Most businesses want to stay in the industry for years down the line, but they fail to plan properly. While it is important to focus on the initial aspects of starting your company, you must also think about future growth and the obstacles that you may face. It is important that you regulate your spending so that you have working capital for future investments.
Borrowing from the wrong kind of lenders
Exploring your borrowing options is also important to financial stability. Make sure you understand the financial lingo, such as the definition of a loan versus a line of credit. With increased understanding, you can make sure that you choose the loan solution that’s best for your company.
Credit mistakes are common in every company, but they’re not all irreversible, so take the appropriate steps to avoid them. The initial commitment to good credit practices may seem daunting, but our team of experts is here to help you with the process. Contact us to learn more.