9 Keys to Selling a Business

Ask a small business owner what he or she is doing to enhance value and chances are likely, you’ll receive some of the following responses:  Growing sales…cutting costs…expanding products… acquiring new businesses…streamlining processes.  These are all good answers, and without a doubt, key drivers.  But unfortunately, business owners often overlook some of the most critical factors that erode value.  When it comes to selling the business, failing to address these factors leaves money on the table.

1.  Get the House in Order

A company with strong revenue, earnings, and cash flow, is inherently valuable.  But the sale of such a business is only possible if someone in the market wants to buy it.   Let me repeat:  the sale of a business is only possible if someone in the market wants to buy it.  Just because a business produces a good return for its owner, doesn’t mean it is valuable to anyone else.

A saleable business is much like a saleable house:  A purchaser will only buy it if the sellers are trustworthy, the foundation is strong, a return on investment is probable, documents are in order, and risks are reasonable.  The best businesses to transact with are those that have their houses in good order.  Poorly positioned sellers are more likely to be forced to apply discounts; increasing discounts by just one or two percentage points can dramatically drag down valuations.  Take a look inside a business and ask if it is as valuable to others as it is to the owner.

2.  Establish an Environment and Relationships Based Upon Trust

Trust is fragile and loss of trust and credibility in business transactions can happen in an instant.  A single undisclosed item, no matter how miniscule or trivial, can derail an entire sales process and tarnish the reputation of the seller.  Don’t hide or distort the truth; it will eventually come to the surface and probably lead to resentment. 

A seller should disclose issues he or she believes may be important.  It’s one thing for a buyer to sign up to a risky acquisition knowing what pitfalls may await.  But it’s another for a buyer to jump into a black hole full of surprises.    

3.  Understand the Psyche of Potential Buyers

When a company begins to clean up the ‘house’ and position itself for sale, leadership should view the prospective transaction from the buyer’s perspective:

• Why does the buyer want a new business?
• What does the buyer want in a new business?  What are the buyer’s hopes and aspirations for the future?
• What are the buyer’s fears and concerns?
• What are the purchaser’s personal motivations?

As in any relationship or transaction, there will be anxiety and uncertainty.  The seller should understand what the buyer wants, alleviate concerns, and lower risk through transparency and honesty.  There should be empathy and assurance to the buyer that what he sees, is what he’ll get.  

4.  Build a Strong Foundation

The purchaser of a business will want to know the strengths of the business and potential risks for the future.  The seller should conduct reverse due diligence and inspect the business; that is, put himself or herself in the shoes of the buyer and examine the business from the opposite perspective.  Areas of focus may include: quality and risks of physical infrastructure, the organizational chart, key processes, customer and supplier bases, quality of employees, management, and leadership.  A buyer is going to want to know if the acquisition will be relatively seamless or a time-consuming, hands-on integration.  The seller should have a thorough understanding of each area and how they align with the buyer’s objectives.

5.  Articulate Potential Risks and From Where Future Growth Will Come

The seller must know the ins and outs of the financials and strategy.  The seller must know where the business currently makes money, where the business will make money in the future, which customer accounts and products are profitable, and which lose money and waste resources.  Customer and supplier relationships must be well-understood:

• Are products sole-sourced or sourced from multiple suppliers?
• What are the dangers if certain customers or suppliers drop off?
• Are there long-term sales and purchase agreements in place that a buyer should know about?
• Is there high concentration with any one customer or supplier?

If risks exist, they should be mitigated.  If mitigation isn't possible, these risks should be articulated to the buyer.

6.  Address High Customer and Supplier Concentration

Having one key, reliable customer or supplier is often looked at in positive light, but I argue the contrary.  Spending so much time and energy meeting the needs of a key partner likely comes at the expense of building out promising relationships with others.  Because the business is not diversified, the loss of a key partner may be catastrophic.  As a rule of thumb, sellers should:

• Aspire to have no single customer make up more than 25% of revenue
• Seek to have contingency plans and backup suppliers in case of emergency

7.  Get Your Documents in Order

A business must maintain timely, accurate, and transparent documentation.  This should include, but not be limited to, the following:

Financial

• Financial information, reports, and statements
• Tax forms and filings
• Regulatory and government compliance

Employment

• Onboarding documents and background checks
• Employment contracts
• Employee handbook
• Employment agreements including W2 and 1099 independent contractor status
• Termination letters and severance agreements

Operational

• Contracts with customers and suppliers
• Intellectual property formulation, filing records, and renewal date schedules

In the absence of such documents, it will be challenging to entice prospective buyers and put them at ease about the 'house' being in order.  

8.  Establish a Leadership Succession Plan

Many business sales are initiated because the owner wants out.  He or she invested time and money to grow the business and now has a desire to move on to retirement or other ventures.  Highlighted in a previous post, one major consequence of ‘founderitis’ is the failure to develop empowered leaders across the organization.  A company must ensure that it isn’t in danger of collapse in the event a key leader departs.  A clear succession plan should be developed and articulated before a sale takes place.  This may require the hiring, diversification, and training of new or existing management.  It also may require the continued involvement of the founder after the sale is executed.

9.  Design to Sell

Strategically growing revenues, trimming costs, and boosting earnings are key drivers in enhancing value, but they aren’t the only considerations.  While owners should position their businesses for sale, understand that isn’t just about the sale:

A business that is designed to sell is also a business that is easier to manage.

The objectives I’ve outlined above – getting the house in order; establishing trust; understanding needs, wants, and fears; building a strong foundation; knowing where growth and risks exist; organizing key information and documents; and building out a succession plan –  are not just important to prospective buyers.  They are important to ANY business owner.

In the event a lucrative opportunity presents itself, be positioned and be ready to pull the trigger.  Even if an opportunity to sell doesn’t come, the business will be stronger, aligned to grow strategically, and easier to manage.  Just because an owner builds a saleable company doesn’t mean he or she actually has to sell it.  The goal is to build a business that is easier to run and easier to market to customers, suppliers, employees, investors, AND prospective buyers.