4 Tips For Business Owners

Each year, thousands of business owners start thinking about selling their companies for any number of reasons: burnout, retirement, or simply being ready to cash out. Brokers (including us) field plenty of calls from people asking if they have a sellable business.

Generally, if you have a well-run and profitable business, the answer is yes. But here are some of the issues a broker will look for that might make it hard to find a buyer.

Unrealistic expectations. We advise owners to meet with their financial planners when considering a business sale. You and your advisor can determine how much you’ll need to finance your lifestyle after the sale. The amount will vary based on your age, your plans, and the other financial assets you have.

Your broker can give you an opinion of value based on your company’s financials and the current market. If the number comes in lower than you need, you may have to make changes to become more profitable and more attractive to buyers or spend a couple of years growing the business. That’s why we encourage owners to start planning years before they intend to sell their business.

Pricing a company above its true value is never successful; savvy buyers will pass on an overpriced company, which may mean it won’t sell for years. It’s better to spend those years working on growing value so your company will command the price you want for it.

Books that aren’t clean and well-organized. Both your broker and your buyer will want to examine your financial records to understand your sales, expenses, and profitability. If your tax returns don’t match your accounting records, it’s a big red flag for buyers. If the books are not well-organized, not detailed, or simply don’t feel right, most buyers will simply walk away. There’s too much risk involved in making an offer based on information that might be inaccurate or incomplete. 

P&L sheets that don’t show profitability. Sales and income are only part of how a buyer values a business. If all the revenue is going to expenses, most buyers will pass on making an offer. Going from a business owner to a business seller requires a significant mindset shift.

Most owners (understandably) practice a tax avoidance strategy, so they write off every expense they can. They may mingle business and personal expenses. They may pay valued employees and family members salaries much higher than market value. It sounds counterintuitive, but taking all unnecessary expenses and tax write-offs off the books is essential when you’re getting ready to sell. 

A profitable bottom line is what buyers look for, and the math works better for the owner, as well. For every dollar you might be saving in taxes, you could be making three to four dollars when you sell. Multiples are based on the Seller’s Discretionary Earnings (SDE), so cleaning up your books will usually pay off handsomely.

Lack of management infrastructure.  Buyers are looking for companies that don’t require heavy owner involvement. Investing in technology, equipment upgrades, and other improvements will attract more qualified buyers to your business. If you, as the owner, are essential to the daily operation of the business, a buyer will have to learn everything you know or budget for a competent manager to run the business. Either way, you’ll wind up selling at a discount because the new owner will have to make those changes. 

Hiring and training a second in command will be an investment that pays off in higher offers when you’re ready to sell.

If I can help you understand the value of your company in the current market, we offer a complimentary and confidential opinion of value.