Business Owners frequently ask me what they can do to make their company more appealing to potential buyers. Besides the obvious of making your business more profitable, there are simple steps you can take to make your company stand out from the others on the market.
When you list your home for sale, what is the first thing your real estate agent typically recommends?
Clean it up!
A dirty and cluttered house can cost you thousands of dollars off your selling price as buyers will use the problem areas to their advantage when negotiating. Likewise, a disorganized company can cause a significant decrease in valuation.
The key areas with the most impact on a company’s value are:
1. Organization of Financial Records
-The most common issue I see when a buyer enters due diligence is a lack of organized financial records. It is not uncommon for P&Ls and Tax Returns to vary but the degree of variance can sometimes be alarming. Most buyers are aware that business owners take part in as many “tax advantages” as possible. The problem arises when discretionary expenses are not easily traceable.
You may save on Uncle Sam but a buyer will heavily discount the value of your company if a significant amount of the profits cannot be made visible. This also affects the buyer’s ability to secure financing which may result in you carrying a larger note than you would desire.
2. Systems and Processes
How much of your company’s systems and processes are documented in writing? If a buyer can’t clearly see a method to the madness, they will highly consider the cost and time it will take to become organized in their valuation of your company. Consider how much time and by what means it will take to train the buyer after the completion of the sale. You will be at a great advantage if you can convey a clear plan of how you envision a smooth transition.
One of the first questions a buyer asks me when inquiring on a listing pertains to the role of the owner and key employees. If you or your employees cannot be easily replaced, consider making an adjustment. Relying too heavily on one or more key employees can potentially create a disastrous situation towards the closing of a sale.
If it is clear that you or an employee takes on too key a role in the company, a buyer’s likely solution will be a long-term employment agreement and / or an earn-out. A contingency for a key employee contract can potentially harm a business if not handled properly. I have even encountered situations where the key employee realized they were in a position of leverage and completely damaged the deal beyond repair.
For more tips on how to make your business more appealing to buyers, please feel free to contact me.
Senior Business Broker
First Choice Business Brokers