The common thread weaving through all of these steps is credibility. We’ve all read what has happened with Enron, Global Crossing, Tyco, etc. and so have buyers. If sellers want to keep buyers moving forward, they must show their respect by being open, honest and accurate about all things, both good and bad.
The first step in a seller’s preparation is understanding if now is the time to sell. If a business’ current financial picture doesn’t match the owner’s expectations, one or the other has to be adjusted.
A seller must also know their reason(s) for selling. It is one of the first questions a buyer will ask so they should be prepared to articulate their reason (s). Ideally, it’s much better when the reason (s) are not urgent. This is why it is better to sell-out when times are good than wait to burnout when they aren’t.
Seller will need to get their books in order. Prospective buyers will want to see at least three years of tax returns and Profit and Loss Statements. Sellers should have their accountant review their P & L to ensure accuracy and they will need to be ready to answer questions about sales, profits, expenses, etc.
As part of getting their books in order, sellers need to understand their business’ true profitability or cash flow. Since most businesses claim a variety of non-operational expenses (i.e. personal auto lease, personal medical insurance, etc.) owners must make sure they have supporting documentation for these. Sellers need to be able to quantify and substantiate this because at the end of the day, although buyers are purchasing a business, what they are really buying is its cash flow.
Sellers must also make sure all of their legal commitments are in order. They need to review their permits, leases, client and vendor contracts, etc. and understand their impact on the business. If the business’s locations is key to its performance, a long-term lease with options would be appealing to a buyer. A buyer may not normally be attracted to a business where any one client represents more than 20 percent of revenues. Formal contracts with suppliers and clients can ensure the continuity of key relationships giving the buyer peace of mind that current revenues and/or rates will continue.
If an owner is absolutely vital to the business, efforts must be made to gradually delegate key responsibilities to various staff members, especially those related to customer relationships and revenue generation. A business that is excessively dependent on the current owner increases the risk in the eyes of a prospective buyer.
When sellers have a buyer coming out to see their business for the first time, it’s important to make a good first impression. Buyers look for companies that show well because it can often be indicative of an orderly run business. The first impression can turn on (or off) buyers and add (or subtract) value from the business.
And finally, sellers should use a professional business broker to enable them to keep focused on increasing their cash flow. They can’t afford to let the business’ performance decline because they’re too focused on its sale. This will only give buyers additional negotiating power to lower their offers. Also, not only does having a third party represent their interests indicate that they are taking this venture seriously; it can often lead to a number of buyers being interested in their business.
Do you have small business questions you would like answered about this article or others? Please visit www.VRWindsor.com or call 519-903-7807.
William Sivell is a sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.
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