You’re Ready to Sell Your Business – But Is It Ready?

For most business owners, their business is their largest asset. It’s what they pour the most time, energy and resources into—year after year. Every owner will transition out of their business at some point, but many businesses are not yet ready to be sold. The retirement plans of most business owners rely heavily on a future liquidity event involving their business. Given how important this future liquidity event can be, why aren’t more business owners prepared for their inevitable exit? Here are three tips to help both owners and their businesses be ready for a sale:

1. Start early

Many business owners run their business until they feel burnt out and then want to sell. The dip in the owner’s drive may result in a decline in performance that, as a result, could negatively affect the value of the business. In turn, this decrease in business value reduces the wealth available to fund the owner’s retirement or to pass on to the next generation. Starting the exit planning process early (a few years before a desired sale, for example) allows for sufficient time to put both a business transition plan and personal financial plan into place well ahead of a transaction. This will certainly be looked upon favorably—a buyer is more likely to proceed with a company that has a logical and well-prepared transition plan, and when the owner has a thorough personal financial plan in place, it keeps the owner in a positive frame of mind and focused on maintaining the health of the business.

2. Think from a buyer’s perspective

Many owners believe their business is worth more than it actually is. While owners certainly have a great feel for their business based on past results, it can help to take a step back and objectively think about things from a potential buyer’s point of view. Asking a question like “What would a buyer actually be getting if they purchased my business?” can provide valuable insight when preparing for a transition.

Thinking from a buyer’s perspective may also help identify any risks associated with the business. Identifying these risks well ahead of a transaction allows time to address them (refer to the next tip) and increase business value. The owner can bet that if potential issues are being identified now, a buyer will certainly bring them up during the due diligence process. Having these items addressed ahead of time instills confidence in the buyer and adds overall value to the business.

3. Address risks

After thinking things through from a buyer’s perspective, we believe it’s imperative to address identified risks within the business. For example, is the business too reliant on the owner? While the owner is running the day-to-day operations, they may also be the best business developer at the company, maintaining key relationships with business partners and vendors. What happens when the owner separates from the business? How will business operations and profits be impacted?

Including key employees in crucial roles sooner rather than later will allow a potential buyer to lean on these professionals after the owner separates from the business. Another example is when there is too much of the company’s revenue tied to a small number of customers. If this is the case, perhaps contract structures can be put into place to mitigate that concentration risk as much as possible for a potential buyer. Who wants to buy a business that risks significant revenue decline if it loses a client?

As mentioned above, many business owners are ready to sell their business, but not all businesses are ready to be sold. There are many things that go into preparing a business for transition, but the above are three critical steps that can be taken now to help enhance attractiveness to a potential buyer and ultimately add value to the business.

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