Getting Your Business Ready for Sale
8 July, 2022
8 July, 2022
Selling a business can be a difficult and often personal process. Business owners can treat their business like a child they brought into the world, making it hard to let go. Owners want to see the business they created thrive even if they no longer own it, which is why finding the right buyer is so important. Finding the right buyer can be a difficult task; however, as a business broker, I have helped hundreds of owners sell their businesses and would like to share a few steps you can take to make the process easier while ensuring buyers see value in your business.
Determine when to sell
Ideally, plan your exit one to two years in advance while continuing to grow your business. You should contact a broker to explore your options well in advance. Many business owners think that is way too early to engage a broker, but a professional business broker will appreciate the planning.
In my experience, many owners tend to overvalue their business, leading to some difficult lessons. When you make the decision to sell your business, you will likely see what other painting businesses are selling for. Keep in mind that just because another company sold for a certain amount does not necessarily mean you will get the same results.
An important consideration that will assist in achieving your goals is having gross revenue with positive year-over-year trends. This will undoubtedly attract more buyers to your business. While having a client who provides steady income is a positive, having one client that generates more than 20% of your total revenue can be concerning for buyers. Do your best to lower your customer concentration to alleviate any concerns. Furthermore, when the time is right, I highly recommend disclosing this to the buyer, as this is material.
Determine the sale price
When determining the sale price, we look at several different variables. These include but are not limited to financials, the owner’s role in the business, how many hours they work a week, experience of the management team, quality of the assets, and how the business is trending year over year.
When it comes to your financials, you should have at least the last three years of income statements, balance sheets, and corresponding tax returns available for a potential buyer to look at. A buyer will examine this information to see if the business is profitable and to validate the overall performance of the company.
A profitable business will typically be valued based on the seller’s discretionary earnings, or what’s known as EBITDA (earnings before interest, taxes, depreciation, and amortization). These earnings are the pretax and pre-interest profits before noncash expenses, onetime investments, and any unrelated income expenses. Having detailed books and records with “verifiable” discretionary earnings is extremely important if you want to receive a fair price for your business.
Again, look at what comparable painting businesses have sold for to help you decide on a ballpark asking price. Keeping in mind, of course, this is simply the asking price, and the final sales price can vary. Put simply, the more attractive you make your business, the more potential buyers will inquire. That will give you the opportunity to receive a higher sales price in the end.
Maintain your equipment
To receive proper value for your business, you must maintain high standards. Make sure your facilities are clean. You don’t want a potential buyer turned off because you didn’t maintain your equipment, clean the warehouse, and present your business in its best light.
Additionally, a buyer is not going to pay top dollar for a business requiring significant capital expenditures. If something is broken, fix it before you show your business. You may not need to invest in new sprayers or trucks; however, you need to maintain your equipment. If a piece of equipment is on the verge of breaking, similar to customer concentration, disclose this information to the buyer so you don’t have issues after closing.
When selling your business, you want to include all of the equipment necessary for the company to operate. This allows your successor to start their work on day one instead of waiting for new equipment to be delivered — which leads back to deriving a higher sales price.
Manage your online presence
Buyers doing due diligence on your business can easily gauge the perception of your company through online reviews. Managing your reputation online is important. Try to obtain new five-star reviews, as good reviews go a long way in solidifying the goodwill associated with your business.
The goal of this process is to bolster your positive reviews, while driving down any old negative reviews. Businesses with negative reviews are not appealing to buyers. If you have any public relations issues, I highly recommend fixing the issues and seeing if you can get the reviews removed, or at minimum, make sure you respond to negative reviews so the public can read your side of the story.
Again, this is why planning an exit is important. Having one to two years of positive reviews can help you sell your business faster and at a better price. Selling your business can be a complex process. Follow these tips as you are planning your sale to position your business for the best possible evaluation and sale. APC
Selling your business can be a difficult and complex process. Working with a professional business broker can be of great benefit in helping you navigate the sale of your business. When selling your business, there are several different structures to consider.
The most preferred way for sellers to sell their business is by receiving a lump-sum payment. This is when the buyer pays for the business in its entirety at one time.
Another typical way to fund the sale of a business is through a financing institution, which allows the buyer to place a down payment for the purchase and make payments, with interest, over a period of time until the seller is paid off. Depending on the size of the deal and available capital, buyers may present deals that include Small Business Administration financing. If third-party financing is not an option, you may be approached with a deal that includes seller financing. In this case, like the bank, you receive a down payment at closing, followed by payments over time until you’re made whole.
Some creative ways of selling your business include an earnout or a longterm partnership. Examples of when an earnout may take place include is when a buyer and a seller can’t reach an agreement on the price of the business or there are significant growth opportunities that may occur in the near future, there are long-term contracts, or unpredictable business trends. When a buyer and a seller agree on an earnout, the seller receives payments from the buyer when certain performance targets are met.
A partnership, however, is different. In this case, a buyer will acquire a certain percentage of your company, usually majority ownership, and you retain the remaining percentage. If you co-own a business, it is important to have an operating agreement in place and to fully understand the roles, rights, and obligations of all parties.
Again, working with a professional broker is the best way to navigate your selling journey and get the right price for your business. Brokers will help you with every step of your selling journey, from getting your books in order to intermediating between the buyer and seller.
Brian Bond is the principal of Strategic Business Brokers Group, a brokerage firm in Scottsdale, Arizona, that has helped business owners sell their business across Arizona. Bond has been named “Broker of the Year” by the Arizona Business Broker Association. More information at www.businessbrokerphoenixaz.com.