The purpose of these articles is to educate both buyers and sellers of the many different issues related to a business transfer. The subject matter includes things like the value of a business, the variables involved in a business transaction, financing and structure of a transaction, planning your exit strategy, etc.
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Tuesday, 21 May 2013
4 Oversights That Make Your Business Less Valuable
Don’t wait until
you decide to sell. Set your business up right with these critical steps
We've all heard at one point or another that in order to get the best
price for your business, you should maximize sales, identify new growth
opportunities, build cash flows, differentiate between your key competitors,
and minimize the owners role.
Taking these steps improves management practices, and can improve the
desirability and marketability of your business.
But there are other critical steps that, if overlooked, may cause your
ideal buyer to discount the selling price, or worse, simply walk away.
1. Transitional training
If you've set a hard and fast end date you may alarm quality buyers.
No one knows more about your business than you. Buyers assume that the
outgoing owner will assist in training and the transition of leadership with
current staff, suppliers and customers.
Buyers get scared off when the training doesn't match up with the
complexity of the business and the experience they bring to the table. Ask your
prospective buyer up front about their expectations—and try to understand why
they're worried. Share your experiences with training new incoming employees in
the past, as this is often an indication of the learning curve.
If you're open-minded and realistic you'll settle on a training period
both parties are comfortable with.
2. Cash deals
You need to show all your results on the books and be open, honest and
accurate about all things.
Growing up I could never figure out the saying, "You can't have
your cake and eat it too." It was only recently, when I met a retailer who
was experiencing double-digit growth for years but not showing it on the books,
that I came to understand the saying.
He was disappointed that he could only secure an offer based on his
"official" books, not the dusty ones he kept in the credenza behind
the desk. Not to mention the line-up of buyers who quickly passed on the deal,
wondering what else wasn't recorded on the books.
Buyers don't trust results they can't verify. The documented financial
performance of the past three year's cash flows will be the basis from which
price and terms are determined.
If the results on the books won't get you the offer you want, you may
want to think about whether now is the right time to sell.
3. Lack of a long-term lease
If location is important to your business, you should secure a long-term
lease before selling.
The lease terms can be a major consideration for a buyer. A restaurant
with a long-term lease on a good location can be attractive. Plus, an expiring
lease could spook buyers worried about possible rent increases.
other hand, a long-term lease can be a detriment for a business that needs more
space to grow. When it comes time to negotiate a new lease, think carefully
about your plans for growth and expansion, your marketing strategy, operating
costs AND potential plans for exiting
the business. Preplanning in advance can go a long ways towards a successful
4. Failure to diversify
Buyers know the impact of losing a customer that represents 20% or
greater of your overall sales could be devastating. Yet, a lot of companies do
have a single customer or a few large customers that dominate their overall
sales. Nobody wants to turn down business! But when it comes time to sell the
company, this becomes a huge problem.
Find a way to diversify your customer base BEFORE you ever decide to
sell their business—a few years in advance.
Start by nurturing the relationships with current customers who
represent a much small percentage of your overall business. Generally a small
volume increase with a handful of good smaller customers will mitigate the
impact of one large customer.
From budding entrepreneurs to sophisticated strategic acquirers, the
opportunity to buy an existing company can be very rewarding. It can also be
very frightening. That's why it's so important not to spook quality buyers.
Even when everything is set up properly, it can be months before you attract
the ideal buyer with the finances and skill sets necessary to buy your
business. The last thing you want is lose the sale because you overlooked
something that you could easily have addressed ahead of time.
Do you have a small business question you
would like answered about this article or others?
is a Business Broker with VR Windsor
Inc., which sells businesses to
buyers across Canada and around the world. His 14-year career includes diverse
senior management positions in marketing, advertising, sales management and
operations management. He blogs about selling businesses at Maxbizvalue.blogspot.ca