A question for business owners thinking of retiring: Is your business ready for sale? Here are things to think about if you are selling a business.
As those who make their living selling businesses can tell you, selling your company is nothing like, say, selling your house. You don’t slap some paint on a few walls, fix a window or two, and plop the “for sale” sign on the front lawn.
The sobering truth, according to the International Business Brokers Association, is this: As many as 75% of businesses put up for sale go unsold. Owners who do sell their firms often find sales prices far lower than they had expected and hoped for.
Because in most cases owners — who have worked so hard to bring value to customers and employees — have not done the job of making their businesses valuable to potential buyers. This despite the fact that the business has produced a nice living and lifestyle for the owner and his or her family.
If you are a business owner or an advisor to business owners, here are some things to think about in making a business as ready for sale as the owner is for retirement.
Successful business people perfect understanding their customers, and their needs and wants. The same is true when it comes to selling a business. The seller must know his or her potential buyer.
There are many communities of potential buyers: Competitors, strategic buyers, private equity buyers, and even family office investors. Understanding what each is looking for in a potential acquisition is a key part of an owner’s pre-sale preparation.
Human nature is such that it is near impossible for anyone to be objective about situations they are close to, or possessions they have emotional attachments to. This is especially true when it comes to value.
Owners are notorious for overestimating the worth of their business. This leads to unrealistic expectations, and potentially failed transactions. Owners need to listen to their independent advisors, and take their advice when it comes to setting realistic sales prices. An acid test question is: How much would you pay for your business?
Earlier this year I had the opportunity to moderate a panel of experts on the subject of the sale of private companies. The panel consisted of representatives of different buying communities – private equity, investment banking, corporate acquisition –all of who were involved in the purchase of many small and mid-size companies.
When asked what is the biggest driver of company value, they hands-down agreed it was one thing about all others: culture.
Too many owners focus on EBITDA times multiple, without understanding that a host of factors, including culture, drive both EBITDA and the multiple. Knowing those drivers for any specific business, and how to improve them, is a key part of being sale-ready.
For too many companies, the quality of management skill drops off sharply once crossing the threshold out of the owner’s office door. Developing a team that can function in the owner’s absence is key. As is having processes and procedures documented, understood, and followed.
At its essential core, any business is a collection of systems and processes: Sales and marketing, talent, accounting, finance, and management reporting, operations, strategy, and even leadership.
Having all systems and processes aligned and functioning optimally is important to building healthy businesses, and should be something owners always seek to do. But in a pre-sale mode, the quality of the systems and processes are more important than ever. They will be a key focus of scrutiny by potential buyers.
If you are a business owner, or an advisor to one, thinking about business sale long before it is imminent is key to successful transactions, and to life and legacy afterward.
Bob Greisman, Director
RKG Consulting Group, Inc