As business owners start down the path of exiting their business, many will be unsure about the viability of a sale. Some owners may be looking for a quick sale and not have the time to implement long-term enhancement programs, forcing them to either accept a lesser than ideal price or consider a liquidation.
If you have more time however, smart owners can take necessary steps to make their business more attractive to sellers. Essentially, the key to selling is to assess the exit attractiveness of your business as soon as possible, define steps for improvement and revisit your plan regularly.
Start by talking with a knowledgeable business broker or exit planner. Through consultations with experts, you'll learn what buyers want and you can work diligently to make sure your business has the hallmarks of a sellable business.
Is Your Business Saleable?
Your business will be easier to sell if it includes some of the following characteristics:
- Current Owner isn't Indispensable. If you were hit by a truck today and couldn't work, could your business survive in your absence? Some businesses are so reliant on the current owner that they couldn't possibly succeed if the current owner were to leave. From a buyer's perspective, that' a huge red flag. If the business depends entirely on one person, whether it's the owner or a key employee that might leave, the business may not be saleable.
- Business is profitable With No Prospects for a Collapse. Market conditions change, and even a once-healthy business can become a money loser. If revenue and profits are in a permanent downward spiral or your business is saddled with huge debts that cannot be paid back from cash flow, don't expect a buyer to jump in and buy the company. On the other hand, if you have documented sustained success, buyers will be eager to join while things are looking up.
- Strong Company Brand. If your company's brand has been badly and irreparably damaged by poor service or a business crisis, your business may have drifted into unsellable territory. While some buyers are willing to take on a troubled company, there's a point at which even the bravest business buyers will steer clear of your company. Ensure your brand is strong within the community and industry. This will benefit you in the negotiation process as well.
- Future Revenues are Safe. Buyers don't like uncertainty. For example, if more than 50 percent of your revenues come from one customer, expect buyers to be skittish. If they buy the company and that key customer leaves, you will have left them holding the bag. Similarly, if all your customer contracts have three-day termination notices, revenues can vanish on short notice and you're putting a would-be buyer's future earnings at risk. In short, buyers would much prefer a company that has a recurring revenue model where revenues are locked in for the future and there is limited risk of customer terminations derailing the business.
- No Skeletons in the Closet. Legal liabilities, chaotic financials that reek of impropriety, labor problems, shareholder infighting and a host of other business stink bombs will quickly turn off would-be buyers. To be saleable, you not only cannot have these warts, you also have to be able to prove to would-be buyers that they don't exist.
Evaluating Business Saleability
It's important to recognize that there is a spectrum of bad and good attributes that impact whether you can sell your business and whether you can sell it for a premium price. Your job is to eliminate the negatives and build the positives.
To do that, you can't look at your business through the often rose-colored glasses of a business owner. Instead, it's critically important to look at your business from a buyer's perspective. Specifically, there are several areas of the business that need to be evaluated to determine the current saleability of your company.
Profitability. Right out of the gate, prospective buyers will want to know if your business is profitable. In addition to a healthy bottom line, buyers will look for a multi-year trend of increasing revenue and a realistic forecast of continued revenue growth going forward.
Net Worth. Financial solvency is attractive to buyers. No surprise there. But the best buyers not only want to know that the company's assets exceed its liabilities--they also require assurances that business revenue will be able to cover their financial obligations and maintain a positive net worth position post-sale.
Market Position. Strong businesses are well differentiated in the marketplace. They offer products or services that are distinct from the competition and enjoy a strong market position as a result. Prospective buyers will scrutinize your company's products and operational processes in order to gauge its ability to retain market position.
Employees. Employees are the backbone of successful small businesses. Is your staff experienced and trusted enough to provide business continuity after the sale? Are key employees under contract, ensuring that they will remain with the business for a set period of time? If not, it could impact your ability to sell the business to top buyers.
Customers. Prospective buyers look for an established customer base that will remain with the business after the sale. The greater your ability to demonstrate a large and loyal customer base, the more appealing your company will be to buyers.
Improving the Saleability of Your Business
After you have determined the current condition of your business, the next step is to establish a timeline for the sale. If you want to exit the business in the near future, you could try to sell the company in its current, less-than-optimal condition--recognizing that you will probably receive less interest from buyers and a lower sale price or be forced to liquidate the business for the value of its tangible assets.
The other option is to develop a pre-sale strategy for targeted improvements in areas where weaknesses currently exist. For example, if the company lacks a solid earnings history, you may decide to postpone the sale and establish a solid growth trend before you take the business to market. If the business has been hit with a legal liability, you may want to move quickly to settle the matter and put it behind you. If a key employee is on the verge of leaving, aim to re-energize him/her and lock him/her in with a long-term employment contract.
Hopefully this gives you starting point from which to evaluate your business' saleability. To take this understanding to the next level, speak with an experienced business broker. In addition to their knowledge of the business-for-sale marketplace, brokers offer expertise in helping you improve the saleability of your company and can play a key role in ensuring that you are well compensated for the goodwill value of your business.