Planning to sell your business must start long before you determine an asking price
For some builders, the best part of starting their own business is the day they sell it. For others, walking away may seem inconceivable. But whether cashing out was in your plans or not, planning is what you’ll need to get maximum value if and when you put the company up for sale.
The successful sale of a business takes time and poses many challenges, each of which can knock percentage points off your offers. Many of these challenges can be avoided or minimized just by being aware and taking the time to plan for them.
According to Mike Handelsman, general manager of the business listing platforms BizBuySell.com and BizQuest.com, insufficient preparation is one of the most common mistakes owners make when trying to sell their businesses. The preparation process should start at least two years before you list it for sale.
Why the long lead time? So, you can maximize your company’s value and minimize risk.
What’s it worth?
How many businesses have you sold? If that’s not your area of expertise, it’s OK. Many entrepreneurs are proud of the businesses they’ve built, and rightly so, but that can bias judgment of fair selling price. An incorrect selling price will cause the business to linger on the market, ultimately drawing suspicion about why it hasn’t sold.
Sellers who undergo a thorough valuation process arrive at an equitable price that facilitates a quick sale. This is a time to bring in the expertise of a professional or professionals who will help you determine the optimal sale price. Consider retaining a broker who can connect you with a powerful network of industry professionals who specialize in vetting potential buyers and negotiating company sales.
These experts can help you determine which of the three most common valuation methods is the best fit for our construction business:
Asset-based: best for construction companies with substantial physical assets, such as equipment or even an office building.
Market-based: best in positive economic times when many similar businesses are being sold and fair market value is easy to determine and defend.
Income-based: best for construction companies with substantial cash flow because it demonstrates future sales.
Yes, it’s going to cost you to retain a broker. For a small business, broker commissions can range anywhere from 10% to 12% of the business sale price. For a larger, middle-market company, fees can range from 35 to 10%. While these figures may seem steep, it’s a worthwhile investment for the same reason why property owners retain a real estate agent: A professional will make sure you don’t waste time with prospects who aren’t capable of buying your company, and their fee will likely be covered by an increase in the final price.
Requiring pre-qualification of potential buyers might seem off-putting, but it actually has the opposite effect. It weeds out prospects who aren’t serious. For prospects who are serious, the vetting process helps push them further toward making an offer. Pre-qualification also helps instill confidence about sharing sensitive information.
The type and quality of services provided vary greatly from one broker to another, as does the size and types of businesses represented. Because it is critical that the business owner selects a broker with the experience and expertise to represent their size and type of business, my clients solicit my assistance as a trusted advisor to help them select the best broker for their business.
Not all brokers are alike. Your business must be marketed by a broker who can make the business stands out as a good acquisition opportunity compared to other businesses for sale. And, you must be prepared to pay a reasonable fee to engage with the right broker that will provide the necessary services to ensure the best possible result in the sale of the business.
What’s left when you’re gone?
Often, business owners are disappointed by the suggested sales price. The most common approach to determine price is to multiply annual revenue by a factor based on the industry, which can range anywhere from 2.6x for foodservice to 4x for construction up to 11x for information companies. However, those multipliers are averages. After adjusting for liabilities and collection risk, a business may sell for significantly less than its industry multiplier would indicate. That is why it’s crucial to plan for an exit and ask an important question: What’s left when you’re gone?
Many small to medium-sized companies owe their operational success to the owner’s energy and efforts. Any buyer who does due diligence may decide they’re buying an asset that will depart with the sale.
A valuable company has assets — both physical and human — that remain after the sale. It is important to build operational processes that will continue to add value after you’re gone and to develop employees with the skills, expertise, and relationships to drive growth without you. Accurate financial records give prospective buyers an objective understanding of earnings and cash flow, and detailed information about key systems and employees will help demonstrate how this value will continue once a new owner is in place.
You can be too involved in your business, and that could impact your ability to sell it. One of the most important ways to increase its value for an eventual sale is to step back and delegate authority to key staff. Their growth and engagement will contribute to the price tag you put on the company.
Show me the money
An all-cash sale is the best of all worlds. There’s minimal risk to you, but your buyer will likely need assistance to complete the sale. Seller-financed business sales offer benefits to both sides.
One of the top benefits to you as a seller is the ability to spread the transaction over a multi-year period and potentially reduce your tax obligation. It can also help you set a higher asking price because you are assuming some of the risk of financing. Conversely, it also means you remain associated with the company you’ve sold.
You’re in the business of building, and that should also apply to the preparation that needs to happen when you decide to sell your business. Put it on a solid foundation so you can get the best possible price. Learn how we can help.