How to Rake It in When Selling Your Business

For many business owners or entrepreneurs the long-term goal is to sell your company and monetize all the value that you have created.

So, what can you begin working on today to ensure that you rake it in from the eventual sale of your business?

     1.  Prepare for a Sale

Is your company in shape to be sold? For too many companies, the answer is ‘No.’ For such companies, it’s time to clean up the company and begin to operate like a company rather than a personal fiefdom.

  • Get the books audited (buyers rarely trust unaudited statements).
  • Clean up legal issues, especially ensuring that you have title to the shares of the business and all assets (including patents and copyrights). To do this, bring in a good lawyer to assess the legal state of the business and all the contracts. And if you have any outstanding legal issues, get them resolved.
  • Make sure that your tax structure is correct, so you can retain as much of the sales price as possible.
  • If you have multiple shareholders, get all the significant owners on the same page and in agreement about the long-term exit plan.
  • Get all the processes and all the facilities in shape. Make sure the business and the operations look spic and span.

    Would you buy a beautiful house if the front door knob came off in your hand? The impressions of your business matters to prospective buyers – a lot.

2.  Develop Relationships with Potential Buyers

Reach out and network with larger players in your industry, as well as potential business brokers or private equity players. What interests them about your business? What do they value most highly, and why? At this stage, your business is not officially for sale, so you’re on more equal footing with them and will better be able to pick their brains and learn what you can do to drive value in your business. Further, these will be the people you can reach out to directly when you are ready to sell the business.

 3.  Build Value in Your Business

The vast majority of buyers will care about one thing – EBITDA (earnings before interest, taxes, depreciation and amortization). EBITDA represents the earning capacity of the business. For buyers, EBITDA thus determines how much debt (which the buyer will take on to fund the acquisition) can be paid off yearly. Most buyer valuations start out with some multiple of EBITDA. So, to increase your sale price, you must first build your EBITDA. Growth in revenue is good only if that means growth in EBITDA.

Second, get yourself out of the business. If you’re still “a genius with a thousand helpers” running the business as a one-man (or one-woman) show, then you’re not creating sustainable value for your business. Buyers hate to be dependent on any one person (you) after they’ve bought a business. So, start to delegate and build successors.

Finally, continue to conduct your business ethically. Good buyers are going to perform extensive examination and assessment of your business (due diligence), and they’ll find out how you run your business and how you treat your customers. Thus, continue to have good, solid customer relations, and continue to have a good reputation in the marketplace.

4. Consider the Timing of Any Deal

Most businesses are sold at multiples of EBITDA. But, the multiples that companies are sold at change depending upon the economy and how “in” or “sexy” a business is. So, think about when you are going to put the business up for sale.

You’ll need to think ahead since the sales process will generally take six to 12 months. Realize that potential buyers will walk away from a deal at the last moment if your business begins to deteriorate during the sale process. A general rule of thumb is to sell moderately early in a growth upswing for your business. That way, you’ll have time to show EBITDA growth, and that growth will be more likely to keep going for another year or so. Deciding to sell too late or insisting on too high of a price will inevitably lead to “no deal.” Remember:

Pigs get fat, but hogs get slaughtered.

5.  Get the Deal Closed

Before you put your business up for sale, have everything ready. You must be aware that the “kimono will be fully open.” In the due diligence process, the buyer will want to know everything, so be ready with accurate details and supply them when asked.

Back to point number one, ensure that you do not have any hidden time bombs that will crash the deal. Two further points to consider. First, negotiate from a term sheet or formal letter of intent that spells out and addresses all the potential issues (payment holdbacks, indemnification, limitations of liabilities, caps and baskets, etc.). If you don’t know what I am talking about, then it’s time to speak with an experienced deal attorney (note: your local attorney who may have only done real estate deals or one or two small deals is the wrong person).

Second, move fast and respond promptly. The longer the deal takes, the more the power shifts to the buyer. Nearly all sellers will go down a slippery mental slope and develop a condition known as the “psychological pre-sale.” As the seller, you’ll begin to dream of the money and life after the sale, and you’re likely to become committed to completing the deal even if it no longer meets your original objectives.

For most business owners and entrepreneurs, selling your business is the biggest financial decision you’ll ever make. As such, it takes careful planning and consideration and the advice of others (especially a respected M&A lawyer and a tax expert) to ensure that you get the most money in your pocket when you sell.


About David Shedd

David has been a President - CEO - COO of an up to $350M group of manufacturing, distribution, specialty retail and services companies, having led 22 different businesses from turnarounds to start-ups to fast growth companies.
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