Is your business sellable? Chances are, you’ve thought about the possibility of cashing out. But while 52% of the owners who are looking to exit in the next five years hope to sell, 48% of those sellers have no strategy for making it happen.
Half the value of owning a business comes at the sale. Often, though, CEOs get wrapped up in the minutiae of running a business and lose sight of their end goal. When the desire to sell hits—and it can come quickly—they’re not prepared. Suddenly, they’re trying to maximize value while they’ve already checked out mentally.
A better strategy is to prepare for the possibility of a sale at any time. Even if you plan to keep the business your entire career, you should always consider its value to a potential buyer.
Stay Ready to Sell
Understanding how to make your business both sellable and valuable to a future buyer maximizes your investment. Here are four ways to stay ready for a sale:
1. Make the business transferable. What would happen if you stepped out of your business? For a lot of businesses, especially smaller ones, a CEO’s departure would spell disaster. The owner is intertwined with operations. What investor would want to buy into that situation?
Yet research shows that 90% of owners of companies valued under $500,000 made no formal plans before trying to sell. Instead of making your business dependent on you, make it transferable. Start by creating written standard operating procedures and consider what else you could hand off to make the business—and its accompanying workload—more attractive to a new owner.
2. Keep clear financial records. No buyer should purchase a business without verifiable financials.But you’d be surprised how often I see owners with disorganized records. When it comes time to sell, you don’t want to be scrambling to clean up your books.
In terms of sale-readiness, this is low-hanging fruit. I’ve seen similar businesses with a 300% difference in sale price based solely on this factor. Make good accounting and record-keeping software and practices non-negotiable for your business. If you’re already in the habit, there’s not much work to do at sale time.
3. Understand potential buyers. When you’re trying to close a deal, it helps to know what kind of buyer you’re dealing with. In acquisition entrepreneurship, there are two types of buyers: financial and strategic. Financial buyers are typically individuals with a long-term focus looking for a well-run company. Strategic buyers are usually companies looking to synergize a new business with their own and maximize value quickly. These two types of buyers have different goals and strategies. Learn what they value before negotiations so you can work out the best terms.
4. Know the market. Finally, you’ve got to have a good sense of your business’s place in the market. First, you should be able to demonstrate your competitive advantage and growth opportunities and show good customer diversity and recurring revenue streams. Buyers want to see that the business hasn’t tapped out its potential.
Additionally, you need to understand the right market segment for your sale. Is it a Main Street deal? Or middle-market? Know where your value fits along the spectrum so you don’t waste time negotiating with the wrong buyers.
Whether you’re planning to sell this year or you can’t fathom leaving your company, it’s always smart to be prepared. You never know when the time to sell might come. When it does, you want to get the most out of your investment for your next venture.