It’s a secret, but seasoned business owners know it: “True entrepreneurs don’t build jobs for themselves, they build jobs for other people.” This notion is echoed in Michael Gerber’s “E-Myth Revisited,” John Warrillow’s “Built to Sell,” and countless other business books advising entrepreneurs on success. As a professional full-time business broker, I’m a little biased, but the sale of the business is the ultimate transfer from business worker to a business owner, and from former business owner to business seller. In many ways, the sale of a business encapsulates democratic freedom and the American dream.
So what are the top five things that business owners need to do to prepare a business for sale? Let’s break it down:
5Document all systems
Document all of the systems that a business utilizes into “Standard Operating Procedures” and employee manuals. Having documented systems gives business buyers confidence, and solidifies the intellectual property that you are selling. Business buyers are always asking themselves “can I just do this myself and save money?” Having this documentation makes your business proprietary and a lot more valuable.
4Record all revenues
In “Main Street” businesses skimming off the top is very common, but when a business is sold you can only ask for what you can prove and revenue not recorded equals a discount on a sale price. Business owners stealing from the top are literally stealing from their future selves, so recording every dollar that a business collects is extremely important.
3Know your numbers
What is the profitability percentage for other businesses in your field? Is it 10%, 20%, 30%? If you know it and your business is not in line with the average, can you give a compelling reason why it isn’t and hence how a future owner could make more money?
Do you know what the typical multiple of earnings is for a business like yours? While a business broker can provide a Broker’s Opinion of Value for you, knowing what your price should be is the only way to know If you are getting good offers.
2Show as much profit as possible
Positioning a business for sale is different than running a lifestyle business. Business buyers prefer to buy profitable businesses, and while they will buy a business that’s losing money, they will expect a huge discount for it.
While it’s common and legal to push personal expenses like luxury vehicles, entertainment, and more through a business, positioning a business for sale means that you want as much money shown on the bottom line as possible. While you will pay more taxes in the final year(s) leading up to the sale of your business, you will exit at a higher value and get all of that money back with cleaner books.
1Choose your advisors wisely
Selling a business is different than selling any other product, and in most cases, a business broker can add a tremendous amount of value. A good business broker should not only get you their percentage or more in additional consideration, but they will also manage the sale of your business, and screen prospective buyers so that you can focus on keeping the value of your business as high as possible.
Additionally, a good business attorney will advise you on contract law so that you don’t have any surprises after the sale, and a great accountant will help you protect yourself from tax implications like capital gains exposure after the sale.
Work with knowledgeable local professionals
Are you ready to make the shift from business owner to business seller and enjoy the financial freedom of exiting a business? Is your business ready for a new owner? Do you have great advisors to get you to this point or find your buyer? We can help, visit our website at VRbizTriangle.com for more tips like these to learn how you can prepare your business and find a buyer.
Neal Isaacs, MBA, CBI is a Business Broker and the owner of VR Business Brokers of the Triangle, located in Raleigh, NC. He writes about business and helps business owners discover their exit options.