When it comes to preparing a high-revenue business for sale, strategic planning is key in order to maximize value and attract potential buyers. In this blog, we cover the essential steps required to prepare your business for sale, ensuring you sell for the true worth of your company.
1. Financial Preparation
Business owners will often use the company’s money for personal things that are not directly related to the business as this can be advantageous for tax purposes. However, when selling your business, it’s crucial to present your business in the best light financially.
Start by reviewing the financial statements from over the last three years, focusing on your income and expenses. It’s helpful to approach this as if you’re preparing your business for public trading, similar to companies on the stock market. The goal is to strip away any personal financial entanglements and present a straightforward, accurate depiction of your business’s operations. This clear financial picture is essential for potential buyers to understand the true health and potential of your business.
Key factors to keep in mind when adjusting your financials include:
- All Forms of Owner’s Compensation – Ensure that the owner’s compensation is neither too high or too low.
- Depreciation – differentiate between tax based calculations and those reflecting economic realities.
- AGAAP Compliance – Align accounting principles to reflect GAAP (Generally Accepted Accounting Principles).
- Inventory Management – Accurately account for all inventory, write off any inventory that is slow moving or obsolete.
- Accounts Receivable – Ensure receivables are collectible, provide an adequate allowance for bad debt.
- Unusual Expenses – These should be itemized and detailed for clarity.
- Deferred Maintenance – Address any maintenance that has been postponed.
- Unused capacity – Assess and plan for any unused areas of your facility.
- Redundant assets – Have a strategy for disposing redundant assets before selling
- Capitalization vs. Expenses – Reassess purchases to determine if they should be expensed or capitalized.
- Charity Expenses – Review and justify
- Real Estate Appraisal – Obtain an independent appraisal of your real estate owned by the business
- Equipment Valuation – Assess the market value and useful life of major equipment
- Future Capital Expenditures – Determine capital expenditures that will be required
Accurately determining the financial value of a privately held company demands a careful recasting and analysis of financial statements to reveal the true earning power of the business. Remember, standard financial statements rarely reflect the genuine profit-making capability of a business, making this recasting process indispensable.
2. Market Research
The First step in preparing your high revenue business for sale is identifying who would be interested in buying it. Knowing your potential buyers helps you customize your sales pitch, making your business more appealing to them.
Next, it’s important to research the current market. What are other similar businesses selling for in the market? This step helps in setting a fair and competitive price for your business, ensuring that you are in line with the market standards.
Market research also helps you spot trends and changes within your industry. This is important because buyers are typically looking for businesses that show promise of continued growth and success. Demonstrating that your business is on an upward trajectory can significantly enhance its perceived value in the eyes of potential buyers.
It’s worth noting that keeping up with these trends and statistics is beneficial, even if you are not actively looking to sell your business. Having this information readily available can provide insights for your own strategic planning and competitive analysis.
3. Operational Preparation
Preparing your high-revenue business for a successful sale involves more than just numbers and market trends. This step ensures every aspect of your business is running smoothly, making it more attractive to potential buyers. Here’s are some key steps to consider in the process:
Financial Documentation: Ensure your financial statements are complete, up to date, and neatly summarized. This will help buyers understand the financial health of your business.
Inventory of Equipment: Compile a detailed list of equipment with their serial numbers, age and current condition. This provides a clear picture of the assets your business possesses.
Employee records: Prepare a list of employees, including their start dates, wage history, bonuses, date of last raise, a brief overview of their duties, and their qualifications. This highlights the strength and stability of your workforce.
Business process documentation: Document and streamline your business processes to demonstrate efficiency and scalability. This minimizes reliance on specific individuals, especially if the business heavily depends on your personal involvement.
Growth and Scalability Plans: Showcase potential for growth and scalability by having clear plans and strategies for expansion.
4. Marketing & Branding
Marketing and branding play a crucial role in showcasing the true value of your high-revenue business. Here are a few key ways to professionally amplify this aspect:
Strengthening Brand Reputation:
Improve your brand’s reputation by focusing on enhancing customer loyalty and fortifying your market position. Engage with a reputable digital marketing firm to augment brand recognition and elevate overall awareness. A solid brand reputation adds a layer of reliability and desirability for potential buyers.
Showcasing Customer Base Dynamics:
Illuminate the strength of your business by presenting a diverse and loyal customer base. Highlighting recurring revenue streams and robust customer retention rates provides concrete evidence of the business’s sustainability. This data paints a picture of not just current success but future stability for prospective buyers.
Emphasizing Marketing Assets:
Draw attention to valuable marketing assets that set your business apart. Whether it’s trademarks, patents, or proprietary technologies, showcasing these assets underscores the uniqueness of your business in the market. Potential buyers will recognize the added value these assets bring, making your business a more attractive investment.
5. Legal and Compliance
Ensure Your Business is Using “Good Business Practices”
Aligning your business with the Generally Accepted Accounting Principles (GAAP) is a fundamental step toward presenting a transparent and reliable financial profile. Here is a breakdown of key considerations:
- If your business operates on a cash basis, make sure all cash is recorded.
- Ensure your inventory levels from the past three years are stated accurately; ensure the inventory is turning properly with the normal number of turns for your industry.
- Make sure your receivables are properly aged; and that you review your customers’ credit rating on an annual basis.
- Ensure that all legal issues, such as leases, shareholder agreements, minutes of annual meetings, compliance with government regulations, and licensing with various authorities are in order.
- Ensure that you have good record-keeping practices.
- Quality assurance and control systems, such as ISO 9000, should be up-to-date and properly documented.
Essentially, it’s important to resolve any outstanding issues that could impact the sale of your business prior to taking your company to market. If you have problems that can’t be quickly resolved, be open about them. Concealing even a minor problem can lead to major trust issues in the future, making the due diligence process more difficult. Any attempt to hide any issue can impact your credibility and affect your ability to negotiate a higher closing price. Your credibility will be lost and the final purchase price will be lower, or the business sale will not be completed.
6. Team and Management
A skilled and stable workforce stands as a cornerstone of your business’s value. Shine a spotlight on your employees, underscoring their qualifications and roles within the company. Highlighting the expertise and dedication of your team portrays a vibrant work culture as well as a valuable asset that potential buyers can inherit.
A clear and efficient management structure indicates effective leadership and delegation. Present a comprehensive view of your management hierarchy, showing how responsibilities are distributed. This not only provides insight into the organization’s decision-making processes but also illustrates a well-organized and smoothly functioning enterprise.
Developing a thoughtful plan for employee transition is also a mandatory step. As you prepare to sell, ensure a seamless shift by outlining a strategy for employee handover. This involves addressing staffing changes and facilitating the transfer of knowledge. Demonstrating your commitment to a smooth transition underscores your business’s foresight and care for its most valuable asset—its people.
7. Professional Assistance
Assemble a Team of Competent Advisors
Take the time to ensure that your accountant is tax-knowledgeable and able to structure the transaction to ensure you retain the most money. If not, retain someone who is. Also make sure that you must have a highly experienced transaction lawyer on your team of advisors.
You should also establish any special skills/expertise that may be required to complete the transaction and have these skills available before you go to market. Specialists, such as an environmental engineer; a real estate appraiser; an equipment appraiser; a marketing expert; etc.; along with a seasoned business intermediary, will help facilitate a smooth and successful transaction. Take the time to establish the goals and objectives in a clear, concise manner and determine the responsibilities of each team member at the appropriate time.
The Business Intermediary’s role will be to find qualified Buyers and to negotiate the highest closing price available.
The Accountant’s role is to explain the tax impact of a proposed transaction and the Lawyer’s role is to ensure that the transaction complies with all laws and regulations and to ensure you are adequately protected.
The Wealth Manager’s role is to ensure you have an adequate investment portfolio to cover you and your family’s future needs.
A critical first step when selling a company is to have any prospective buyer sign a confidentiality agreement. This legally binding document emphasizes the gravity of secrecy. Confidentiality Agreements/Non-Disclosure Agreements (CAs/NDAs) are sometimes perceived as having limited effectiveness within the industry. However, their efficacy greatly depends on the obligations outlined in the document, which each party must commit to upon signing.
A robust CA, one that not only mandates the company but also extends its reach to encompass the company’s employees and advisors on an individual basis, represents a solid foundation. When there are personal consequences for individuals, rather than merely at the company-wide level, people tend to exercise greater caution to prevent breaches of confidentiality.
The CA should encompass several critical aspects, such as:
- Under the CA, a crucial stipulation involves the prohibition of communication with employees of the target company. This measure is designed to prevent the unauthorized sharing of confidential details and ensures that information remains within the authorized channels, creating a controlled environment during the sale process.
- The CA should impose restrictions on discussions related to any aspect of the transaction or the target company. This ensures that only individuals who have formally committed to confidentiality are privy to sensitive details. By limiting access to essential information, the agreement creates a secure space for negotiations and maintains the integrity of the sale process.
- An effective CA goes beyond internal boundaries, preventing engagement in conversations with customers or suppliers regarding the transaction. This external restriction is crucial for maintaining a unified and controlled message throughout the business sale. By limiting external discussions, the CA protects the interests of all parties involved and minimizes the risk of leaks that could impact the negotiation process.
9. Have a Good Reason for Selling Your Business
There are many reasons why a business is put up for sale, and most buyers will inquire as to why you want to sell your business. If the reason given does not seem reasonable or realistic, it will create doubt in the buyer’s mind that perhaps you are hiding some negative things from them; things which could seriously harm the future operations of the business.
Many buyers spend a great deal of time with a prospective seller, only to learn the seller really hasn’t decided to sell yet. The net result is no transaction and the buyer has spent a great deal of money in legal fees, accounting fees, financing fees, and due diligence costs. Most seasoned buyers are quite wary of this possibility, and, as a result, will probe long and deep to understand your true reason for selling your business.
|Best Reasons to Sell:
|Worst Reasons to Sell:
|Business Starting To Fail
|Lack of Capital
|Unable to manage growth
|Divorce or partnership dispute
Remember that transparency is not a vulnerability but a strength. By showcasing your business in its truest light—operational efficiency, a stellar team, and a fortified foundation—you not only attract the right suitors but also set the stage for a harmonious transition.
By addressing these points, you can significantly increase the attractiveness and value of your high-revenue business when preparing it for sale. Consulting professionals experienced in business sales can be invaluable throughout this process.
Partner with Robbinex to Sell your High Revenue Business
Robbinex specializes in helping owners of mid-sized companies sell their businesses. Let our decades of experience work for you!
Robbinex has accumulated knowledge based on almost five decades of experience and approximately 450 closed transactions. Factors we believe are successful to the sale of a business include:
- Client motivations, including fully understanding the goals of our clients
- Proper preparation of a business for sale
- Comprehensive preparation of the information required by investors
- Effective execution of a transaction, supported by the proven Robbinex Three-Phase Process™ for selling a business