Hope is Not a Strategy When Considering the Sale of Your Small Business
If only hope could make it so. Selling your business is not something that happens by accident. It takes intention and real effort. JT Kraai from Exit Strategies 360 shares some very real considerations every business owner needs to contemplate. Article originally appeared here.
7.5 Key Variables When Preparing Your Company for Sale
At some point, every business owner considers selling. After just a few minutes of thought, many owners realize there are many more questions than answers regarding: Business value, timing, legal and tax considerations, confidentiality, retirement, etc.
The next question is “Where do I start?”
The answer? Start getting educated. Start getting your questions answered. It’s your business, your money and your life; the goal is to stay in control. This is not a business decision you should leave to chance. As a U.S. Air Force special ops pilot suggested, “Hope is not a strategy.”
Ideally preparation would begin three to five years in advance. History indicates actual preparation time is a fraction of that. (Hint: Results are always better with preparation.)
Buyers contemplate dozens of variables when considering the purchase of a business. Here are 7.5 key variables to consider when preparing to sell.
1. Financial Trends
Specifically, sellers should consider what the three-to-five-year trends are for gross sales, gross margins, profits, and adjusted earnings. Fluctuating sales are part of this industry, so these estimates don’t have to be flawless. However, clear explanations are essential when communicating the trends.
2. Clean Financials
There are a number of financial questions to consider before selling. Do you have an accurate profit and loss statement and balance sheet? Some companies sadly do not. Are the expense categories organized in a way that reflect your business operations? How many “miscellaneous” categories are listed? Can you quickly access detailed financial information surrounding business and personal expenses?
You will face a barrage of questions surrounding your numbers; clean financials help build buyer confidence.
3. Owner Involvement
This one is simple: How many “hats” are worn by you as an owner? More importantly, can a buyer expect to duplicate those efforts? Any buyer wants to see an owner working 35 to 45 hours a week, with a job description that is replaceable, not unreachable.
4. Key Personnel
Point three leads directly to the quality and tenure of your key personnel. Actual numbers will vary based on the size of the company. Small companies should have one to two employees, with larger companies having five to seven. Questions a buyer will ask include:
> How long have they been in the industry?
> How long have they been with your company?
> On a scale of one to 100, how well do you trust them to lead and manage?
> When you are away, what types of phone calls (and how many) do you receive?
Key employees are indispensable to transitioning the company once you’re no longer there.
5. Customer Base
When a client, insurance company, or TPA accounts for more than 18 to 20 percent of your gross sales, red flags begin to appear. Realistically, you’re not going to walk away from this work, so take it! But, know higher percentages (25 to 80 percent) can limit your sales options. This variable may determine the sales structure, spreading the risk between you and a buyer.
6. Understand Why You’re Selling
Most often, this point gets overlooked or pushed aside. However, understanding your own reasons for selling is key to making your best decisions. Are you bored? Tired? Able to retire and want to spend more time with your spouse and grandkids?
Every seller is asked this question, but seriously and honestly asking yourself (and answering) it in advance is key.
7. Know Your Options
This point is all about getting educated. It’s necessary to find out if you actually can retire. Important questions to answer are: What is your company worth? Will it be SBA financeable? What’s the most likely sales structure? What will you pay in taxes?
As Jim Collins states in Good to Great, “You absolutely cannot make a series of good decisions without first confronting the brutal facts.” It’s simple; these “brutal facts” become your education and foundation for your upcoming decisions.
7.5 Separate Emotion Versus Reality
As selling your business is possibly your largest financial decision, it can be tough to separate your emotion from the reality of a sale. Per the above, “brutal facts” can help peel back the emotion, adding clarity to a complex decision.
Without basic planning, defending a realistic sales price can be difficult. After years of blood, sweat and tears, your eventual exit deserves some level of preparation. As with most any form of preparation, the earlier the better.
JT Kraai is president of Exit Strategies 360, which specializes in business valuations, exit planning, and business sales. He can be reached confidentially at 503.577.5649 or email@example.com.