Eighty percent of business owners who put their businesses up for sale fail to sell them within a year. That depressing statistic comes from Jessica Fialkovich, co-author of the new book Getting the Most for Selling Your Business and a founder who's successfully sold two businesses herself.
Why don't most businesses sell? One reason is that owners set unrealistic prices or terms, she says. But a second big reason is that they're not really ready for sale. As she puts it, "Businesses aren't prepared for an actual transition."
But according to Fialkovich, if you fully follow the five steps below, you can flip those odds to 80 percent in your favor -- and increase your sale price by up to 50 percent.
1. Clean up your financial documents.
The single most important thing you can do to ensure a sale and get your selling price up is to clean up your income statement and balance sheet, which together will give a prospective buyer a picture of your company's general financial health, Fialkovich says. You may think you've already got this nailed -- after all, you update these documents whenever you file your taxes. The problem is that you could potentially make your company look financially weaker than it really is.
Let's say you put some resources into developing and market testing a potential product or service but decided not to go ahead with it. Those expenses show up on your income statement but they aren't part of what you're selling. Or perhaps you report your car as a business expense, since you use it for business purposes. Items like these can lower your apparent profitability and thus your sale price.
How do you fix it? Start by getting professional help -- you probably shouldn't do this on your own. One approach is to work with a bookkeeper to move those expenses out of your business entity and either take them on as personal expenses or create a separate business entity (one that you are not selling) that will absorb these liabilities. Or, if your planned sale is more than a year in the future, you can simply move those expenses out of your income statement in future tax filings. "I ask our clients, 'Does the business really need it? If you replaced yourself with an employee, would you give that employee a car allowance or a cell phone?' And if the answer is no, it's likely not a legitimate business expense and it needs to come out," she says.
2. Make it less about you.
Most buyers assume that the founder or founders will be gone from the company within a year -- in fact, that's a legal necessity if they use SBA financing for the purchase, Fialkovich points out. So if your company depends on your ability to do everything and anything, that can frighten a potential buyer away. Many founders take on too many roles, believing they can do each job better than anyone else -- and that might sometimes be true, she acknowledges. "But maybe you can find somebody that'll do it 80 percent as well and will free up your time to do something that's more valuable for the business."
She recommends you start by giving away the tasks you hate most. Bookkeeping is a good example of something many small-business owners hate doing that could be done by an employee or freelancer. Once you've given up that first task, look for other things to delegate -- it's like building a muscle, she says. And needless to say, keep a close eye on your profitability if getting help with these tasks means increasing your expenses. "Ideally, you're relieving yourself of roles that are theoretically lower paid and moving yourself into a higher-paid position where you are generating more revenue as an owner," she says. You will also need to make some changes to the company's marketing, promotion, and customer relations if you have made yourself the company's public face, she adds.
3. Review your contracts.
Your contracts with customers and vendors are assets of your business, and you need to make sure those assets will survive a sale. But for that to happen, the contract must include an assignment clause that specifically says you can assign the contract if you sell the business or its assets. Without that clause, those contracts won't be assignable, Fialkovich says.
What should you do if your contracts don't have these clauses? Start adding them to your contracts whenever you renew them, she advises. But do it before anyone knows you're planning to sell, or you could put yourself in a very weak negotiating position.
4. Create an owner's manual for your company.
Key processes and tasks that you and your employees perform should all be well documented ahead of a potential sale. This may sound like a tedious job, but you can turn it into a team-building exercise, Fialkovich says. "You can say, 'Hey everyone, we're going to do some cross training, so if Liana goes on vacation, Susan can take her role. So I'd like you to spend the next week documenting your role and everything you do. Then we're going to have some lunches as a group and explain our roles to each other.'" You, as founder, should also participate in this exercise, explaining your own role to your employees.
Even if you aren't selling, those documents will be very useful if any of your team members leaves or is unable to work for a while. And they can form the basis for a handbook of how your company works that a potential buyer might find invaluable.
5. Clean up your reputation.
What do online reviews say about your company or its products? "In terms of getting ready for sale, if you don't have any reviews, that's less of a concern than negative reviews," Fialkovich says. "But if you have negative reviews, you need to tackle it. It's helpful right off the bat to at least respond professionally. Often, you can use a response that says something like, 'I'm so sorry about your experience. I'd love to make it right. Please connect with me here.' Try to push them offline so you're not having the conversation on Google."
It can also help if you solicit reviews. There are companies you can hire to do this for you, but since, for most small businesses, 10 or 20 good reviews are enough to make a big difference, it may be more effective for you to personally reach out to your most loyal customers or referral partners and ask for their help. "Those reviews will be more recent and push the bad reviews lower down," Fialkovich says. "To a buyer, it will just look better."