Maximizing The Sale Price Of Your Business

April 17, 2017

After spending years of building and growing your business, it’s time to cash in your chips and reap the rewards of your labor. But how do you make sure that you are receiving the best price possible for your business? Experts say that there are a few preparatory measures you can take to maximize the sale price of your business

Know what your company is worth 

In too many cases business owners have no real idea of what their company is worth. They may know of a friend or colleague that sold his business for some percentage of sales without knowing any of the financial details supporting the valuation. Buyers acquire businesses for the value of future cash flows that are dependent on margins, labor costs and the likelihood that they will retain the customer for years to come. Don’t fall into the trap of believing that all sales dollars are equal and naively applying a rule of thumb.

In order to negotiate the best price you’ll need to determine its true value, I recommend having a professional business valuation done. This allows you to know the approximate value of your business so you are negotiating from a position of having information, rather than from operating on emotions.

Demonstrate its value

The most effective method of boost- ing the sale price of your business is to demonstrate its worth to potential buyers. Business owners should create a sound revenue model — one that is sustainable, recurring, predictable and profitable. By laying out clearly the value of the business, prospective buyers will be encouraged to offer a higher price.

Any business owner knows that increasing sales is no easy task. But a rise in sales in the period leading up to a purchase can help boost the price significantly. Buyers are more excited about growing businesses, so if you can show that your company is on the rise, you should be able to fetch a higher price.

A business that has customers under contracts is worth more. Buy- ers want assurances that what they are paying for today will still be there a year from now. Granted, contracts vary widely in their enforceability but nonetheless they give a new owner an additional degree of security that positively influences purchase offers.

If possible, you should also seek to build a highly diversified customer base. If a significant portion of your overall sales is wrapped up in a single customer, your business will pres- ent much more risk and therefore be less attractive to potential buyers. By diversifying your consumer base, you will minimize the potential impact that the loss of one large client would have on your business.

In order to negotiate from a position of strength, first and foremost a business must be profitable. An unprofitable business places a seller in a weak position and forces him to explain or rationalize why he is in that situation. No one buys the opportunity to lose money.

Prepare the books and records 

Transparency is critical to avoiding any negative surprises with your prospective buyers. That’s why I recommend having your due diligence materials reviewed in advance by professional advisors. Comprehensive, accurate and up-to-date records and statements will help demonstrate the value of your business to potential buyers. These records should include P&L’s, balance sheets, and, if available, statements of cash flows for the three years preceding the sale and year-to-date for the current year. They need to be clean, consistent and easily understood. The less explanation required the better.

Your ability to promptly provide professional financial documents is many times the first impression that a buyer gets of you and your business. If a buyer must wait several weeks for information that should be readily available, it reflects poorly on you. Additionally, having good records will shorten and simplify the due diligence process.

Keep operations running smoothly

Before seeking out prospective buyers, you must ensure that the company continues running smoothly throughout the selling process. Be prepared to have the dual obligations of running your business and managing the sell-side deal — you cannot let business slip during this critical time.

A solid management team with well defined systems and processes will not only enable a seller to keep the business on an even keel, but will further demonstrate to buyers that the business is professionally run and not overly dependent on the owner. A supporting team will also enable you to give the energy and thought necessary for a successful sale.

Bring multiple buyers to the party

This is absolutely the single most important way to maximize the sell- ing price of your business. In my experience, no buyer brings his best offer to the table initially. They may say that they do but history doesn’t bear that out. A managed competition among prospective buyers is key.

It is imperative that you keep in mind that the buyer does not have your best interests at heart. That is not to say that they would intentionally do something to your detriment but rather that they want the best deal for themselves and their companies. This is the nature of negotiations and it is important to stay objective throughout the process.

Managing a multiple buyer process is a complex task. It requires creating a level playing field for all buyers involved, such as sharing all available information with each while keeping their offers confidential. Buyers want to be treated fairly and doing so reflects well on you and your business. In most cases this process is best handled by an intermediary who has the time and experience to manage the process successfully. Positioning an intermediary between you and prospective buyers also creates a stronger negotiating structure for a seller.

In conclusion, most business owners only get one opportunity to sell the business they have built over many years. Don’t sell yourself short by not taking the appropriate steps to maximize the value.