5 Ways to Prepare Your Business for Sale Now

Often a business owner decides to sell his or her company, but finds there are many aspects of the business not ready for a sale. While it’s possible to prepare the business for sale rather quickly, it will lead to a band-aid approach to changes rather than sustainable evolutions that will maximize the value of the business and the sale price.

Constant focus on business growth and sustainability forces business owners to de-prioritize aspects of the business that just work, yet that reduces the value of the business in terms of a sale.  Only when they are faced with the opportunity to engage with buyers do they begin making the necessary adjustments.

This lack of foresight unfortunately leads to money being left on the table. Ryan Guthrie, Director of the Private Equity Practice, BDO USA, said, “The majority of business owners who sell their business don’t plan ahead in preparation of a sale. In most cases, a lot of things that could have increased the value of the business and decreased the risk for buyers was not done.”

So what can be done to prepare for an exit with an uncertain time horizon?

1. Executive Management: The most essential step that a founder can take is to build out a full management team that can run the business without the owner. It takes a significant investment in time and attention to prepare a competent management team, but it’s also one of the most essential ingredients for a profitable exit. Without exception, the sale process becomes more arduous and fraught with complication if a buyer doubts the ability of the company to run in the absence of the founder. These concerns are not limited to owners near retirement age either. Young owners have little incentive to remain involved. Scott Humphrey, Executive Managing Director and Head of U.S. Mergers & Acquisitions of BMO Capital Markets, said, “In the case of an exiting owner, the buyer needs to come in and not only get comfortable with the business, but ensure the business will continue to grow without the owner. This increases risk greatly.”
2. Middle Management: Larger middle-market companies often prepare for a sale by bolstering management, but far fewer companies take the initiative to develop a strong set of middle management talent. Expanding the management capabilities beyond the executive level reassures buyers and ensures a seamless post-sale transition.
3. Financials: It is common practice for business owners to prepare an audited set of financial statements two years before a sale, but there are also financial preparations that can take place much earlier that will help ready a business for an exit. Foremost among them is the process of separating out the company’s real estate holdings from the rest of the business.  Robert Snape, managing director at BDO Capital Advisors, said “we’ve often seen owners carve out the real estate from the business and sell the business to one party and sell the real estate to a separate buyer.” However, if an exit is a possibility in the next five years, Guthrie at BDO advises against making dramatic changes like relocating a factory or any other business change that would appear to disrupt a growth trend.
4. Customers: When there is a long-term horizon of sale, it is also beneficial to look at ways to add to the sustainability of earnings. Buyers want to see customer diversification and reduce the risk of loosing key customers that would depart with the founder, especially if those customers make up a significant portion of the revenue.  
5. Corporate Structure: It is important to examine the corporate structure of the company. There are important tax consequences that come with selling C-Corp and S-Corp businesses. Guthrie advises company owners to keep the end in mind and to determine what the optimal corporate form would be for the business. “There’s not a lot you can do a year before the sale,” he warns. “But there’s a whole lot more you can do 10 years before the sale.”

It is more crucial than ever for owners to plan ahead to maximize the enterprise value of their company. If the past several years have provided any lesson to sellers, it is that company valuations are at the mercy of the marketplace and business owners will want to be ready to take advantage of market timing.

Can a Business Broker help you Buy a Business?

If you are considering a business broker to help you purchase a business, it is important that you understand exactly what business brokers do, what help they offer, and what you should look for in a business brokerage firm.

A business broker works with you to access your needs and help you through the buying process. In most cases, the business broker's fee is a percentage of the selling price, and is paid once the sale is complete, either by the buyer or the seller. Often, the fee is paid upfront by the seller. In instances where the business is being owner financed, the fee is often part of the loan payment. Business brokers work somewhat like realtors.

Before choosing a business broker, check the broker out with the Better Business Bureau. It is also a good idea to ask the broker for the contact information of people who have used their services to purchase businesses in the past. Follow up and talk with those business owners. If the business broker will not provide you with references, walk away. You should also check to see if the business broker is a licensed real estate broker, or if they are a member of the Association of Business Brokers in their state. Check with the licensing agencies and the associations to see if there have been complaints.

A good business broker will evaluate the businesses, and provide you with financial statements and cash flow statements for the businesses you are considering. While they do not provide financing, they will usually work with you to find financing, or help the seller to owner finance the business in a way that protects both parties. A broker that is working for you will ask you several questions, including why you want to start a business, what your educational background is, what special skills and interests you have, the maximum down payment that you are able to put down, if there is a specific type of business that you are interested in buying, where you would like to be located, and what the minimum income required to meet your living expenses is. Licensed business brokers are committed to providing the potential buyer with full disclosure about the business. If you have a question, ask the broker. Your first question should be, “Why is this business for sale?”

It is important to note that most sellers will not allow the broker to give you detailed financial information about a business until you make an offer. Therefore, it is important to make an offer that is reasonable as soon as you know that you wish to learn more about the business. You can always withdraw your offer if you find that you are no longer interested. The broker should provide you with enough information to make your initial offer.

If you are interested in using a broker to help you locate and purchase a business, it is best to work with a network that includes a large number of brokers. You will be assigned to one broker, but when a business owner contacts the network to sell a business, that offer is available throughout the network, which gives you exposure to more opportunities. When you use a private broker who is not part of a network, you may be limited to the businesses that use that particular broker.

Good business brokers usually prove to be an asset to both the buyer and the seller, saving both parties time and money, by offering advice and consultation, handling negotiations for the sale, answering all questions that either party may have, and walking both parties through the process of buying or selling a business.