By Scott Bushkie, President Cornerstone Business Services Inc.
If you are thinking of selling your business, make sure you get top dollar for all the hard work and sacrifice you’ve put in. To do that, you must maximize cash flow and reduce risk for the new owner. Here’s how:
Drive cash to the bottom line.
Most businesses are sold as a multiple of cash flow. The buyer must be able to pay off debt and still take a salary or get a return on their investment. More cash flow equals more debt they can pay.
Ideally, prepare three years in advance by removing any personal expenses or perks you’re running through the business, and account for all cash deals. It’s better to take the hit on your taxes now, because you’ll get a much larger return when you sell your business.
Develop your team.
Work your way out of the business by developing a management team and cross-training staff. If you handle most of the sales, start transitioning those relationships to a key employee. The more the business can run without you, the more valuable it is. For example, we’re selling a company in the health care space right now, and the owner has taken three two-week vacations in the last four months. Buyers like that because it demonstrates the business continues to run, even when the owner is gone for large periods of time.
Diversify customers and suppliers.
Most buyers are comfortable with your top customer representing 15 to 20 percent of sales. If more than 20 percent, potential buyers may walk away or build contingencies into the deal structure. Likewise, having multiple suppliers/sources for your key products and materials reduces dependency and supply risk.
Create recurring revenue.
This is a trickier task, but recurring revenue companies will get higher multiples than project-based businesses.
We’re representing a fire protection business, and a few years ago the owner shifted the focus from marquee projects to ongoing service accounts. Now the buyers can count on a certain amount of cash flow every month rather than depending solely on large ticket sales.
If business practices reside mainly in the owner’s head, the buyer may not be able to replicate day-to-day operations.
The most common example is an owner who is in charge of estimating and prices jobs based on a private system only he/she understands. At the very least, write down the process you use. Better yet, set up an Excel worksheet that can auto-calculate an estimate based on data inputs.
Much like selling a house, you need to get rid of the clutter, dispose of obsolete inventory, and organize messy offices. When I take buyers through a well-organized business, they invariably comment that the owner clearly takes pride in the company. When buyers see things that aren’t well maintained, they start to worry about hidden disorganization and deterioration.
Sprint to the end.
Burnout is the second leading reason business owners sell (after retirement), and unfortunately, it’s often associated with a lower sale value. Sell before you need to. Make a strong push at the end, and go out on a high note. Develop new accounts, identify opportunities for growth, and show buyers a business on an upward growth trend.
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