Tips to Prepare Your Client’s Business for Sale
The following is written by Mary Beth Koester, Manager of Business Valuations at Rea & Associates.
As you prepare clients for an exit, there are a few key areas and metrics to consider. Keeping in mind that exit planning can, and should, begin years in advance, you will be able to watch as these metrics change over time. You’ll become an important advisor to the business owner, making your role critical to their success.
These common factors can impact the value of a business:
1. The industry within which your company operates
2. The size of your business
3. The timing of the deal between buyer and seller
4. The terms of the transaction between buyer and seller
5. The current business owner’s financial records
6. Discount for lack of control – if a minority shareholder is buying-in
7. Discount for lack of marketability – if a company’s stakes can’t quickly be converted to cash
8. Whether or not the sale is being transferred to a family member
Consider the value of a business from the buyer’s perspective. He or she is evaluating the business from an investment standpoint, and comparing the expected ROI (return on investment) of owning this particular business versus another business. A savvy buyer will pay attention to the following eight financial indicators:
• Financial performance. Want to woo a prospective buyer? Consider the business’s financial performance as one of the key pieces of information factoring into their decision. The more consistent financial performance has been in the past, the better it looks to a prospective buyer.
• Growth potential. Financial performance gives the buyer a glimpse into the past. Growth potential, on the other hand, will paint a picture of the company’s future. Since buyers are investing in the future of the company, its potential for growth is essential.
• Risk mitigation. The business should not be dependent on any one customer, employee or supplier – it’s too risky and will be a big red flag to a buyer.
• Equipment. Has it been more than a few years since the company’s equipment was updated? Then it may be time for an upgrade. If a buyer has to allocate more of their money to equipment costs, they are less likely to pay a higher asking price for the company as a whole.
• Recurring revenue. If a business can provide the buyer with a dependable and consistent revenue stream, then it will look much more attractive to the buyer – particularly if that revenue stream is secured by a contract.
• Market control. Future cash flow is important, and the higher the barriers to entry, the harder it is for a competitor to take away market share. What differentiates this specific company?
• Customer satisfaction. High customer turnover likely means there is a problem with the business, and, if the company does nothing, it may impact the way the business is perceived in the marketplace. A buyer might hesitate to take over a company with a bad reputation.
• Owner independence. If the business is dependent on one person’s leadership, it’s going to be difficult to make the sale. In fact, the buyer may try to retain the owner’s presence in the company for a period to ensure a smooth transition – which could defeat the purpose of selling in the first place. Instead, start building a solid management team to ensure that your business will continue prospering long after you are gone.
As a financial advisor who may have a client that’s considering selling their company, the first step that’s often considered is getting a valuation. While it’s true that your client needs a valuation of their company, make sure they also pay attention to the factors listed above to help ensure their company is in the best sellable position when they decide they want to cash in on their investment.
Whitepaper: Generating an Accurate Business Valuation: Important Considerations for the Income, Market and Asset Approaches
Practice Aid: 5 Ingredients for a Successful Business Exit
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