Roger Murphy, president, founder and CEO of Murphy Business & Financial Corporation of Clearwater, FL provides advice for baby boomers on preparing to sell their business prior to putting it on the market.
By Roger Murphy
Approximately 700,000 to 800,000 small to mid size businesses change hands each year.There are many steps business owners need to consider before hanging up their boots. As a seller it is important to consider the following when planning an exit strategy.
When is the best time to sell
Timing is everything
When you're on top, the company is doing well and the industry is flourishing, and next year looks even better
Decide when to sell, timing is important but sometimes it is not in the sellers control
Cyclical factors are important
For example, in retail most revenue is earned in 4th quarter. Thus, it is recommended that you aim to sell your business in the 1st quarter of the following year to show good revenue and the inventory is at lowest point.
What to do to get ready
Organize the books and records
Deal with any customer/vendor/employee issues prior to sale
Try to increase revenues, increasing sales important to buyer, they analyze trends
Diversify customer base, spread to as many possible customers
Customer concentration is a risky issue for buyers, and their lenders
Adjust inventory to a normal level
Eliminate unproductive employees,
Collect past due accounts receivable
Other smaller items: update website, renew leases, clean the premises
De-emphasize owners' personal role in the business
Not being the only decision maker
Getting others involved in customer contact, and vendor contact
Develop a management team or a right-hand person
Build infrastructure and reduce dependence on owner
Reduce number of family members working in the business, especially if they will be leaving
Reduce the amount of owner's perks that are paid for by the business
Don't live out of the business checkbook
Sell or remove unnecessary or personal assets
Seller needs to decide
Are you truly ready to sell, can you let go or will that be difficult
If this a family business, do others depend on the business for their livelihood?
Can they adjust afterward (sometimes the business defines who you are, it is a significant influence on the sellers personality)?
Do you still have the drive to build the business or at least maintain the current level of business
Many sellers hang on too long and the business goes downhill due to lack of attention
Prioritize which items are most important in the sale.
In every business sale there is negotiation where the buyer and seller have some give and take
Understand which things are not as important and where you can compromise and still get the desired results
Make sure to analyze what the post sale looks like. Will you have enough money, what will you do with your time?
What matters most to buyers
Proven verifiable books and records, tax returns
Leverage and terms - they want to use bank financing, owner financing and as little of their own money as possible
Solid, verifiable cash flow
Furniture, fixtures and equipment properly valued and in good condition
Positive appearance of facility, good reputation
Favorable lease and lease options
Training, transition period with the seller
Covenant not to compete, non solicitation agreement
Solid reason why the owner wants to sell
Experienced employees who will stay on
No last minute surprises
Why is the prospect looking
It's a buyers' market so a lot of buyers are bottom fishing for low ball offers
Desire to be own boss, control destiny
Lifestyle - to be in charge of own time
Financial independence - make money and build an asset with value
Desire to grow and improve the business they purchase
Who are the buyers
Individual buyers - 70 percent of all buyers are first time buyers, often displaced corporate employees who will be owner/operators replacing a job
Strategic buyers - in similar business but not exactly the same, looking to enhance their existing business
Competitors/vendors/customers - looking for synergies to reduce costs, ability to cross sell to customers, gain market share
Financial buyers - interested in cash flow, looking for good return on investment, usually with intention to sell at a profit
Strategic corporate buyers - could be competitors, suppliers or customers
Buyers look for ways to enhance the business, is there an "upside". They generally think that they can do better than the previous owner.
Get a proper business valuation done to set the selling price
Most business owners are not aware of how businesses are valued - they need for a professional to give advice
Sellers assume value based on emotion or rules of thumb
They overvalue based on how much time and work they put in; and how much it means to them
Generally they think the value is higher than the market value really is
Get good advice from a CPA or tax attorney
The first step before business valuation is to re-cast the financial statements, or normalize them
Most small businesses operate their companies in a manner to minimize taxes-when selling they need to know the true economic value that the business has. This is done by analyzing financials and eliminating all non-operating expenses and discretionary expenses. Determine how much money the new owner will have
Generally businesses sell for a multiple of what they earn or SDE (Sellers Discretionary Earnings)Another formula is a % of Revenue. Hard assets are not a driving force in business valuation.Some assets add or subtract from value such as A/R, Inventory, Work in Process
Comparable sales data bases are used to determine market multiples.
Type of deal structure. Is it an asset sale or stock sale, most are asset sales.
Stock sales usually result in lower tax for seller but has disadvantages to buyer
The allocation of the purchase price is important but often overlooked
It is not how much you sell for but rather how much you keep that is important
Many use installment method for part of the sale proceeds if they give seller financing.
This defers part of proceeds until you receive them.
Seller needs to be able to articulate a legitimate reason for sale, such as a life event such as retirement, health issues or relocation.
How to present your business in the best light
Businesses sell based on the perceived value to the buyer.
While financial statements are important, they are not the only factor.
Sellers need to point out other significant items of value in the business and develop a proper offering package.
Those items could be: long term clients, repeat customers, key employees, outstanding reputation in the community, strategic location.
To contact Roger Murphy, call or email Sarah Prentice email@example.com
847-580-4234 or visit www.murphybusiness.com/