Over the years we have had a variety of questions posed by business owners. We thought it would be a good idea to put some of the most common questions in one place for easy access. This blog series is a compilation of those common questions. This five part blog should provide a good starting point for most business owners.
Below is Part 1 to the Business Owners FAQ. The following are the other segments of the FAQ in the suggested order of reading:
- Part 1 – When Should I Sell My Business
- Part 2 – Potential Buyers
- Part 3 – True Market Value
- Part 4 – The Acquisition Offer
- Part 5 – Common Mistake and Conclusion
When should I sell my business?
First, and perhaps most importantly, the seller needs to assess the market appetite in his industry. The past year has shown pricing multiples at an all-time high in many industries. Bank lending is competitive and generous, so buyers can easily finance acquisitions. Public trading multiples are high, so the largest public buyers can readily justify aggressive pricing.
Timing is everything in maximizing the value of your business through a sale. Recent history of depressed times, 2001/2002 and again in 2008/2009, confirms that timing is critical to a successful sale at a premium price. Strong pricing cycles typically move in 3-5 year waves. Ideally, the time to consider sale is nearing the crest of the wave. If your industry is strong, you should target completion of the transaction before the next downturn. An important point to remember, “Timing will be set for you, not by you”. Stay alert and don’t miss the best timing or you will not realize the maximum value for your company.
If I’m not ready to sell now, but expect to do so within a few years, what should I do to prepare?
There are a number of value enhancement steps that can be very effectively taken in advance of sale. The top “5” follow:
- Focus your business. One of the single largest value enhancers is the niche focus within a business. Buyers will almost invariably pay far more for the business that is very focused, and very strong in its specialty niche. Also consider mounting a strong public relations effort to enhance reputation in your chosen field.
- Consider a “SWOT” analysis with top management. “SWOT” stands for Strengths, Weaknesses, Opportunities, and Threats. These are issues which future prospective buyers will inevitably explore and unearth, and your ability to discuss them intelligently will be greatly enhanced if you’ve been monitoring them and positioning yourself to face issues well for a year or two ahead of discussions with buyers.
- Take steps to reduce owner dependency. Strengthen your second tier management. Get non-compete agreements in place for key employees. Ensure that customers deal with more than one key person within the organization.
- Clean up financial and legal records. Utilize a quality CPA firm, and consider an audited financial statement, or, at a minimum, a review. Write off old assets with questionable value. Get all patent, license, and trademark issues resolved and documented. Clean up minutes, corporate registrations, and licenses to do business, to ensure no last minute crises occur.
- Review physical facilities to enhance marketability. Consider EPA Phase I reviews, if never before done. Obtain valuations on key and costly real property. Review major capital equipment, and document maintenance programs and future equipment enhancements needed, to present a credible and solid perspective to buyers.
Continue reading onto Part 2 to learn more about potential buyers, or skip to Part 3 (True Market Value), Part 4 (The Acquisition Offer), or Part 5 (The Most Common Mistake and Conclusions). Please feel free to contact us directly if you have any questions or if you are interested in exploring a possible sale of your business. You can also learn more by requested one of our publications. In particular, our book “The Practical Guide to Selling Your Business” and the article “Uni’s 12 Value Drivers to Increase Corporate Valuations” are very valuable to business owners interested in learning more about selling their business. We hope to hear from you soon.