(even if you don't want to sell it)
“When people try to sell their businesses, they are often shocked at how little a buyer is willing to pay.“ Karen Clothier, Business Group leader and former business broker, told our San Rafael group how to prepare now to make your company worth more later. (Karen helps business owners do this.) Here’s a summary.
As you read this list, you may have the same reaction I did: “Most of these things, every business should do—even if you never intend to sell.”
“To-do list—1 to 5 years before you expect to sell“
- Show a profit. Many people run their businesses to minimize profit, to avoid paying taxes. Alas, this makes it very difficult to a) get a bank loan for the buyer, b) sell for a decent price. Banks, and buyers, want to see a record of profitable operation. Telling them, “I really was making money, but I charge personal expenses to the business to minimize taxes,” won’t impress them. Remember, any additional taxes paid for the year or two prior to sale will be recouped many times over by way of a higher sale price.
- Clean up your financials and tax returns. Do a minor audit. Separate your business and personal accounts. Buyers question complicated financials. Demonstrate that you run a clean business.
- See how your operating ratios compare to others in your industry; e.g., owner’s salary to net profit, revenue per employee, cost of goods sold, inventory turns, net profit percentage, accounts receivable aging.
- Increase profitable sales. Evaluate your different lines and types of customer to see which are most and least profitable. Maybe some should be dumped. Or prices raised.
- Reduce costs. Review each expense item on the P&L. What could be trimmed, eliminated? What hidden personal expenditures distort your bottom line?
- Review employee costs. Do you have excess people on your payroll? Could some work be done by a lower-cost person? What functions could be outsourced?
- Have a good management team in place. Good backup for yourself. Cross train. Frees you up to focus on growth and profitability, and creates more valuable asset to sell.
- Reduce as many tasks as possible to standardized procedures. This increases productivity, gets “secret knowledge” out of your head and others, thus freeing you up, and gives you a more professional operation.
- Inventory. Clean it up. Sell off stale goods. Take physical inventory, so you know what you have.
- Review your space needs. Secure space needed for expansion, or lease out excess space.
- Take on no unnecessary new debt: refinance old debt at lower interest rate.
- Review vendors and service contracts. Negotiate better deals where you can. Extend critical tech support.
- Review leases and agreements. Are they assignable? Do any need to be extended or renegotiated?
- Convert leases to owned assets if it makes sense (unless you have expensive buyout clauses) to reduce interest expenses on the P&L.
- Spruce up. Clean up and dust. Get rid of accumulated clutter and old supplies. Repaint. Redecorate. Have a newcomer with fresh eyes tell you how your place looks.
- Post your awards and good reviews.
- Update and upgrade your literature and materials. Put things online: catalogs, forms.
- Settle any lawsuits or complaints from customers, former employees, etc.
- Document your intellectual property: patents, trademarks. Who owns it? What are your licensing agreements?
- Review your liability insurance coverage.
- Have a board of advisors—people who are successful in your industry and understand your business.
- Review your vulnerabilities. Anticipate questions and problems. Fix them or know how to fix them.
If you do these things, you then have a choice:
1. Sell, and your business is worth more.
2. Keep it, and your business is more profitable and runs with less attention from you.
To find out how businesses are valued, get an “appraisal lite”, or advice on when to sell for maximum price, contact Karen Clothier at kclothier@businessphysicals.com, or (415) 381-6934.
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