Most Baby Boomer business owners, when asked when they plan to sell, will say “in about 3-5 years.” After 5 years have passed, and you ask that same business owner the same question, their response will often be “in about 3-5 years.” It might be the owner is just not ready to sell; it is difficult to let go of a business and walk away.
I have found the businesses that sell the quickest and for the best price, have owners who have been coached at least three years before going to market. Here are some of the coaching tips and steps business owners should take to get ready to sell:
- Establish a Dataroom
Once you’ve decided to sell and you engage with a buyer you will need to provide a mountain of documents during due diligence. This is extremely time consuming to pull together all at one time. If your time horizon is 3-5 years, start now in establishing the dataroom. Slowly add to your dataroom so it is ready to go when you are ready to sell; a simple DropBox account will suffice. Everything from tax returns to leases to the employee handbook should be uploaded into your dataroom.
- Reduce your Customer Concentration
Nothing scares away a potential buyer more than hearing your number one customer is 50% or more of your business. A strong customer that continues to place order after order is low hanging fruit, yet it is dangerous in the mergers and acquisitions world. Make sure your sales team is developing new accounts. Diversify your customer base. No buyer wants to risk buying a business with high customer concentration knowing that if that customer leaves, a large percentage of sales goes with it. Even if a buyer does decide to buy your business with high customer concentration, they will negotiate a lower price because of the risk. No one customer should be more than 10-15 % of your revenue. This concentration theory also applies to your vendors.
- Establish a Strong 3 Year Trend
Many businesses have been hit hard by COVID-19, with their numbers being low in 2020. 2020 could be your base year in establishing a strong 3 – year trend. Strive for each year that follows to show increasing revenue, gross profit, net profit, and EBITDA. Buyers love to see a business on the rise! Should you decide you want to sell in 2021 or 2022 and you don’t have 2020 as your base for 3 years, a buyer should understand the implications of COVID-19. You just want to make sure 2021 and the beginning of 2022 show promise in recovering from the pandemic and your temporary financial downturn.
- Remove yourself from the business
Too often the business owner is still a key player in the business when he/she decides to sell. Remember: the buyer is not buying you, they are buying your business. Spend time grooming key employees to take on more responsibility or hire qualified management staff to perform your duties. Once you feel you have a strong management team in place, go on vacation for a month. You’ll be surprised to see how your employees will step up when provided the opportunity to perform without you, the owner, around. Buyers are looking for businesses with strong management teams in place.
- Manage your Inventory
You want to stay on top of your inventory and inventory process and reduce anything that has become obsolete. On occasion, I’ll encounter a hopeful business seller that has a large amount of inventory on the balance sheet, some of which is obsolete. The buyer only wants to acquire your inventory that is still applicable to the business. Clean up your inventory now to save time and offer a realistic price.
Most business owners have a majority of their net worth tied up in their business. They anticipate they’ll see a large windfall the day they sell. Unfortunately, if the owner does not take the time or spend the money on a coach to plan properly, their windfall will fall short.
There are numerous steps an owner can take to get ready to sell. The above 5 tips are extremely important steps and if followed properly will provide your anticipated windfall.
This article was written by Sam Thompson. Sam is the president and owner of Transitions In Business, a Minnesota based M&A firm that specializes in selling healthcare, business to business, transportation, manufacturing, distribution and IT companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming an intermediary, Sam was a successful CEO and business owner for 29 years before selling his $16 million business.