Good time to sell or not, the internal state of the business and the mindset of the owner trump market conditions. We’ve discussed in recent blog posts (here and here)the market outlook and conditions for business sales that have made now the time to sell – for those that are ready.
Here are 7 steps to figure out if you are ready to sell your business:
- Assemble the information you will need to provide the buyer. The top documents you need to have at the ready are your tax returns for the past five years. Audited returns are a major plus as they give buyers confidence. A confident buyer may mean a better sale price, so now may be a good time to start having financials reviewed if you don’t already. You will also need information on your customer base, employees, suppliers, and competitors. Information needs to be readily accessible and dependable.
- Review your profit and growth in recent years. Declining revenues and earnings are a negative sign for prospect buyers. Identify whether you’ve been growing, staying stagnant or declining the last few years. If you are selling because the company is going downhill, it will be tough to find a buyer and get a decent sale price. For earnings, adjusted EBITDA is the best calculation method to use as it is also used in the business valuation process (see definition below). If recent years haven’t been as profitable, you may want to focus on increasing earnings over the next few years before you sell.
- Evaluate your management team. Buyers will be assessing the depth of your management team and how well the company will operate without you. All day-to-day and critical functions need to be able to be performed by your staff in a competent and effective manner. If you are the only one who knows how to perform certain functions or management heavily relies on you in any way, think about hiring in new talent or creating a plan to develop your current staff.
- Evaluate your customers. The diversity of the customer base is important to buyers. Companies that rely on a few customers for a large portion of revenues pose more risk to buyers. Buyers may negotiate paying the sale price of the company over a series of years to account for this additional risk. As a general rule, the top ten customers shouldn’t account for more than 50% of revenues and no one customer should account for more than 10% of revenues. Ideally, no customer should account for more than 5% of revenues.
- Evaluate your suppliers. Supplier diversity is also important as reliance on a few key suppliers can also create additional buyer risk. Assess the number of suppliers you use and how easy they are to replace. If you have a few key suppliers but it is easy to switch suppliers, diversifying your suppliers may not be important.
- Identify potential deal breakers. Are there any unresolved issues within your business that can pose a problem for buyers? Any loose ends related to ownership, intellectual property, bank accounts, suppliers, customers, non-compete issues with employees, law suits and so on can get in the way of closing a sale. Identify any major issues and resolve them prior to sale if possible. If you can’t resolve an issue, be upfront with a potential buyer about the situation and have an action plan to get the issue resolved.
- Define what your life looks like after the sale. This is a crucial step to take before you list your company for sale. Figuring out what comes next is important to ensure you can cope with the change and are ready to move on. Having this picture in your head will make it easier to let go of a huge piece of your current day-to-day life.
After taking the steps above, you should have a clear picture of your company’s strengths and weaknesses in the eyes of a buyer. Many of the items above directly relate to the value drivers used to valuate a business and determine a sale price. Your business doesn’t need to be in a perfect place to sell, but you do want to ensure it is marketable and that you will be able to attain a reasonable sale price. If you are still unsure if you are ready to sell, writing out a list of pros and cons may reveal the answer.
DEFINITION: Adjusted EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization where the EBITDA is adjusted for unusual expenses and compensation and normalized to more market based benefits and compensations required to operate the business.