It is difficult to quantify the value of the effort that you have put in to build your business over the years. And if you are preparing for a sale, the least that you’d expect is a large payout. However, without the right conditions in place, you may still struggle to get even a fair amount for your sale.
Putting up your business for sale isn’t as simple as it sounds. Getting ready for a sale needs a lot of preparation upfront. You will need to set up your M&A team as finding the right buyer requires tedious work. Even when you find a buyer who is a match for your company and the letter of intent (LOI) has been signed, the work doesn’t end there.
Many deals fall apart during due diligence, the period in which your buyer will fully evaluate your company’s assets, liabilities, and growth potential. You may think that you have all your affairs in order, but M&A is notorious for being a turbulent process. Speedbumps along the way are normal, but many studies show that 70% to 90% of business acquisitions fall apart. To not fall into this ratio, it’s important for business owners to plot out a comprehensive exit strategy before making an acquisition announcement. Before you put a lot of time and money into selling your business, remember that preparation is key to a successful acquisition. Whether you’re looking for an investment or looking to exit, take the time to be on top of the following things so you can be well on your way towards a profitable deal.
Ensure Financial Performance and Valuation
Many business owners are not fully aware of their company’s valuation. It is advisable to get a professional financial assessment to initiate a sale process. An early assessment will highlight areas that need to be changed and tightened in order to make your company more attractive to a buyer.
Before going to market, it’s important to have a clear idea of your company’s financial health. Your books are one of the first things a potential buyer will review during the due diligence process and it’s critical that all earnings and expenses are accounted for. The majority of buyers are interested in financial performance including earnings ratios, return on equity, and financial projections.
Invest in hiring a professional team that can clean up your books as well as create forecasting reports for the future of your business. Doing this will help you determine the valuation of your company and understand the range and the multiples at which your business could potentially be sold.
While you may have a good idea of the worth of your company, a professional outsider valuation can point out your company’s merits, limitations, and financial standing without internal bias. This gives you an opportunity to decide whether you are ready to exit or if you need to correct issues or improve your business performance before going for a sale.
Present a Compelling Growth Story
Apart from your company’s current financial performance, your potential buyers will take a deep look into your growth strategy as well as the history of the business. They will be interested to hear your thoughts on the future growth of your business. They would like to see the genesis and the evolution of your business over the years. You will need to present the strength of your employees, your current relationship with your customers and vendors, and your assessment of the future of the market. All of this needs to be presented in a cohesive manner that makes your business a very attractive sale.
Many business owners struggle to create a good sales pitch. In order to avoid that, you will need to develop a story about your business. You will need to weave your market growth potential with your company’s capabilities. You will need to go beyond the functional features, make it emotionally appealing, and show why your company sale makes sense for your buyers. It’s your job as an owner to effectively portray a persuasive growth story to your prospective buyers.
Your growth story should entail how you started your business as well as the steps, actions, and strategies that brought it to where it is today. Oftentimes, business owners start successful companies but fail to create a growth strategy that will sustain them in the future. When selling your business, it’s important for you to show that the company is scalable and on track for growth. Even if it’s lucrative now, your business should be able to adapt to the constantly changing industry landscape.
It’s your responsibility to articulate to your buyers that not only will your business survive in the future, but it will also thrive. To do this, you need to carefully craft a growth strategy that takes into consideration the industry you’re in, and your market, and create actionable and realistic steps that will keep your business profitable.
Take into account proven data and statistics that relate to your industry and your target markets. Make sure you have backup plans as well as a means to stay relevant to your audience over time. Determine all your avenues for growth and make the most out of them. Define how you can hit your financial projections and provide practical steps to meet them. This is the story that you will be telling your prospective buyers to convince them that your business makes a good investment.
If you were given a minute to talk about why your company would make a good investment, what aspects of the business would you talk about? It’s extremely important to identify your company’s competitive advantage. This can ultimately lead buyers to choose to invest in your company instead of another similar business that’s up for sale as well. Your competitive advantage includes factors that enable your business to produce goods or services better or cheaper than its competitors. Communicate how you provide value to your target market and how you differ from companies in similar niches. Your value proposition can be anything from your products, service, reputation, and even your location. Determining the points of attraction of your business exhibits how your company fares against its rivals and shows potential buyers what makes your business an excellent purchase.
Sort Out Bottlenecks that Hinder Productivity
During your initial assessment, you are likely to discover a few constraints or bottlenecks that prevent your business’s productivity. These constraints could be a lack of skills, inadequate technology, insufficient planning, or delays in decision-making. In many cases, it could be due to excessive decision-making dependency on you as the business owner. It could be due to incoherent processes and practices followed in your business. It could also be due to financial constraints that prevent you from expanding your business or from upgrading your legacy technology setup.
Most buyers would like to understand the existing bottlenecks during their due diligence process. As a business owner, you will need to address as many of these constraints as possible before you engage with potential buyers. By addressing these bottlenecks upfront, you may even be able to increase the valuation price of your business.
Every business has constraints around which they operate. By acknowledging these constraints during your discussions with a potential buyer, you show them transparency as well as give them a certain level of confidence in the transaction.
Work on Operational Independence
The main aspect of operational independence is the amount of dependency on the owner.
It’s worth taking into consideration how independently your business can run without you being involved. Once the business is sold, you will either take on a new role under the arrangement with limited responsibilities or exit the company.
Oftentimes, the success of a business relies heavily on its owner. Buyers tend to be wary of this fact because success is not guaranteed once the owner exits. A company that functions smoothly with limited dependency on an owner is considered an attractive asset for a potential buyer.
If your company’s performance heavily relies on you, hire new leaders or adopt processes that will allow it to function even when you leave. Assemble a core team that you can entrust with all aspects of the business. Make an effort to document and record all business procedures, policies, and guidelines in a database that is easily accessible to all team members. This ensures that the business will continue with the foundations that you built. Align all your goals and visions for the future of the company and make sure that every member of your team is working towards those same goals.
If you were to continue with the business, the past independence in decision-making likely will not continue under the new management. The new management would most likely reduce over-dependency on you and create arrangements accordingly.
You should start limiting the time you spend running your company and observe if the day-to-day operations still run efficiently. Buyers prefer businesses that can run independently, and it’s imperative for company owners to establish this before announcing the sale.
Protection from Market Dependence
Many businesses are heavily dependent on one or two customers for the bulk of their revenue, or dependent on key suppliers for their raw materials.
It is important that you have some provision to protect yourself from these dependencies. Of course, the most obvious one is to hedge your market risk by increasing the number of customers or suppliers. Many business owners are so enamored by their existing customers that they don’t actively pursue any other potential customers. Similarly, there are other demanding customers that leave the company with very little time to do anything else.
Situations like these may work for you in the short term but if you plan to sell your business, you must increase the number of customers to get a better valuation.
Similarly, being dependent on one or two key vendors result in the same condition. Sometimes, it is not easy to walk away from these key vendors. These vendors may have a monopoly in the market like utility providers, restricted raw material providers, or an e-commerce platform. Under these conditions, think hard about your operating model. Any reduction in dependencies will reduce the risk for the buyer and you will be able to get a better deal for your business.
You have put in years of sweat and effort to build your business. You have toiled hard to get your business to where it is today. You have spent many hours being happy as well as anxious as you developed your business. Unfortunately, the world may not ever get to know about these facts. Moreover, most of them may not even care.
But you care. You care about yourself and your business. That is why it is imperative that you take equal care, if not more when you go through the sale process.
There are many factors that can hinder an acquisition from completion. The success of your deal hinges on preparation. Before going to market, make sure that you do not compromise any external or internal components that could affect your selling price or bargaining power. Make certain that your books are in order, streamline your operations, and define what gives your business an edge against the competition. With adequate preparation and prioritizing of the points mentioned above, your chances of a successful sale will improve tremendously.
No amount of money can ever replace the hard work and effort you put into growing your business. The least you deserve for your business is a good sale.