Preparing for a sale can add substantial value for you as a seller, if you do it early and correctly. Part 1 of this series covered transition plans and management incentives, and Part 2 covered key financial decision making and organization.
Once you have familiarized yourself with those steps, continue with the important steps outlined below.
Create a Future Strategic Plan
Nobody wants to buy a business that’s best years are in the past. Understandably, buyers pay more for future opportunities and growth.
Even though you may be ready to sell your business, you need to demonstrate your business has plenty of opportunities ahead of it. Therefore, it is important that you create a three- to five-year strategic plan.
This will help you identify opportunities and issues to address prior to selling the business and give potential buyers a roadmap to future growth prospects. The more opportunities and growth you can demonstrate to a buyer, the more value they will place on the business.
Beware of Making Unnecessary Investments
If you are contemplating a sale, resist the urge to make investments that aren’t required to keep the business operating or those that may not show a financial benefit in the short-term, like an acquisition.
If you are planning an exit within a few years, it is risky to have to integrate an acquisition successfully on a short time table or pursue a brand new and unproven operating strategy. This is as important a time as ever to make sure that the rewards justify the risks.
If an investment lowers your financial performance in the short run, you may be penalized in terms of a lower valuation, even if the investment pays off in the long run. Obtain objective input from your trusted service providers to give you an extra level of scrutiny to ensure that your investment doesn’t decrease the company’s value during a sale.
Also, beware of making acquisitions or pursuing opportunities that could complicate your business to investors. For example, if you sell a shelf-stable food product and suddenly decide to sell a product needing refrigeration during transportation, your decision could limit the number of buyers for your business; some buyers with shelf-stable only distribution may not see the combined business as a fit for their business – or they might give you less value for it.
Beware of Business Cycles
While you can’t always time the market for selling your business, you can time your own business cycle. If your business is growing, you may worry that your next year will be bigger and that you may be missing out on value by selling it today.
However, timing works both ways and you will severely decrease the value you receive for your business if you wait to sell until the growth has slowed. I personally have seen the sale value of businesses cut literally in half because the owners waited one year too long and sold after a non-growth year.
Growth businesses get to participate in future value through getting a larger, growth-oriented valuation multiple for their business. Also, there are mechanisms such as earn-out structures that can help you participate in future growth of the business.
After reviewing your numbers, if you have had growth over the past few years and expect that to continue for at least the next year, you are at the right point in your business cycle to take advantage of a sale. If you have hit the skids, you will want to right the ship to get the most value possible when selling your business.
Selling a business can be an emotional endeavor, but it can also create a serious payday for you as an entrepreneur. Be thoughtful and thorough with your preparation – and make the sales process pay off for you.
About Carol Roth
Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including
of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.
Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.