You Are Ready to Sell Your Business but Is Your Business Ready to Sell?
For most business owners, their business is their biggest asset. It is what they pour the most amount of time, energy, and resources into. Every owner will transition out of their business at some point, but many businesses are not ready to be sold. The retirement plans of most business owners are heavily reliant upon a future liquidity event involving the business. With how important this future liquidity event can be, why aren’t more business owners prepared for their 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 could result in a decline in performance which, as a result, could negatively affect the value of the business. In turn, this decrease in business value decreases the wealth available to fund the owner’s retirement or to pass 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 well-prepared transition plan and when the owner has a thorough personal financial plan in place.
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 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 can help identify any risks associated with the business. Identifying these well ahead of a transaction allows time to address the risks 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 value to the business.
3. Address Risks
After thinking through things from a buyer’s perspective, it is beneficial 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 and maintain 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 risk as much as possible for a potential buyer.
As mentioned above, many business owners are ready to sell their business, but not all businesses are ready to sell. There are many things that go into getting a business ready for transition, but the above are critical steps that can be taken now to enhance attractiveness to a potential buyer and add value to the business.
Matt is a wealth manager at BDF. He sits on BDF's Financial Planning Committee and leads many of the firm's tax-related initiatives. Matt has a passion for building strong relationships with his clients and helping them make sound decisions. He also holds the Certified Exit Planning Advisor designation which helps him advise business owners on how to exit their business and prepare for retirement.