So you wanna sell your business. As you can probably imagine, there’s a lot of steps between that thought and executing on it.
To that end, we previously published a post outlining the 6 steps to selling your small business (as a refresher, you can see the steps below)
- Determine your “Why”
- Assemble your Team
- Prepare the Business
- Valuation
- Find the Right Buyer
- Pass the Baton
We’re gunna focus on step 3 in this post — Prepare the Business.
What does it mean to prepare your business to be sold?
What do buyers look for in a business acquisition?
If you’re considering selling your business, the best time to start preparing is now. There are a number of actionable steps you can take today to immediately make your business more attractive as an acquisition target (and maximize the value you ultimately represent to a future buyer).
Get Organized
Potential buyers want to see a well-structured and organized business. Disorganization can be a red flag that suggests underlying issues.
During their due diligence, prospective buyers will send you a request list with the corporate documents and records they want to see. Depending on the buyer, this list can be extensive. It’s important to have these files readily available in an electronic, shareable format.
The items on that list will vary depending on the nature of your business, but it often includes financial statements, tax returns, customer and supplier contracts, insurance policies, and documented policies and procedures (more on this below).
You want to appear the opposite of chaotic — a business that runs smoothly (with great documentation) is significantly more appealing to buyers.
Button up financials
One of the first items a buyer will scrutinize is your financial statements. Clean, well-documented financial records not only inspire confidence but also make the due diligence process much smoother.
It’s very common for small businesses with a single owner to pass certain “personal” expenses through the business. When being evaluated for an acquisition, though, these personal expenses will be added back to your bottom line (as they won’t continue post-acquisition).
Some add-backs are inevitable and completely normal. That being said… the more add-backs that show up, the more cause for concern from a buyer (and each of those items will be looked at with a level of scrutiny).
If there’s a substantial deviation between what you’re saying the business made vs. what it could have made (if these add-backs were taken into consideration), it creates a level of scrutiny that can dissuade potential buyers.
Buyers want transparency and confidence in your numbers; taking time to refine your financial reporting will pay dividends in the sale process.
Moral of the story: if you’re looking to sell your business, be careful with the personal expenses you’re currently running through your business.
Understand Key Man Risk
A lot of small businesses are effectively dependent on one person. That could be your top salesperson, the owner/founder of the business, a key technical person, etc. We call this “key man (or woman) risk”.
If your business’s “key man” were to no longer work there — to the point it would cause a significant disruption to the business and its operations — that’s a sign you need to start mitigating that risk as you gear up for a sale.
There’s a number of ways to address key person risk:
- Develop a strong management team that can operate independently
- Document processes so key knowledge isn’t locked in a single person's head
- Consider long-term incentives or retention agreements to keep essential employees engaged post-sale
- If you as the owner are the “key man,” you may want to consider staying on for a period of time after the sale to allay those concerns from a prospective buyer
This is a particularly important consideration for an owner-operator.
When we’re considering a company purchase at City Different Investments, we often tread lightly with businesses whose owner has all of the key customer relationships and hasn’t delegated any management responsibility.
Why is that? Because it creates an environment in which the leadership and business operations aren’t sustainable once the owner leaves.
To us, a business with a well-distributed leadership structure and delegated roles and responsibilities is far more attractive than one where success hinges on a single individual.
Standardize Processes and Procedures
Buyers are looking for businesses that can continue to operate smoothly after the transition. Standardized and documented processes help ensure continuity and scalability (and give buyers peace of mind).
To that end, carve out time to:
- Create standard operating procedures (SOPs) for critical functions
- Implement clear training programs for employees
- Use technology to streamline workflows and reduce reliance on manual processes
Businesses with well-defined systems are easier to integrate and scale, making them more appealing to strategic buyers or investors.
Know Thyself
Finally, it's important to go into a transaction knowing your business's strengths and weaknesses. Conduct an internal audit to understand your business's unique and defensible capabilities and how you differentiate yourself from the competition.
On the flip side, it's also important to recognize your business's weaknesses (and not be afraid to discuss these with a potential buyer).
Discussing the weaknesses and areas for improvement shows the buyer two things:
- It demonstrates a level of transparency that can build trust in the transaction process
- It allows the potential buyer to see growth opportunities
Preparing your business for an acquisition isn’t something you do overnight — it takes planning and execution.
By getting organized, refining financials, reducing key man risk, standardizing processes, and understanding your strengths and weaknesses, you’ll position yourself as a more attractive target for buyers.
Here at City Different Investments, we invest in and acquire small businesses (usually between $500k and $3M in cash flow).
We talk with business owners daily and are more than happy to share our perspective on what we look for in a great business.
If you’re considering selling your business (or would just like to learn more about our strategy and process), don’t hesitate to reach out to Joel Van Essen, our Director of Private Investments.
The information contained in this communication has been designed for general informational, illustrative, and educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security. Moreover, the information provided is not intended to provide any investment advice whatsoever. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.