This blog post was written for Business Link by Village Wellth. Village Wellth is a digital platform that supports small business buyers across Canada. They guide buyers step-by-step through the process of buying a business. Here are 5 tips that they recommend every seller should carry out when preparing to sell their business. Taking these steps will make your business more desirable to buyers and help keep your business healthy, years after its sale.
Are you a business owner thinking about selling your business? Preparing the sale of your business is an incredible leap and is not as straightforward as you might think.
When a homeowner lists a house there’s usually an excited buyer around the corner. That buyer is often ready to make an offer whether the house is turnkey or not. When purchasing businesses, things are a bit different; buyers need to investigate every detail of a company’s bigger picture. As a business owner, there are things you should consider before selling.
1. Prepare Your Financials and Documents
Before selling your business, review your company’s financial history. Do you have accountant-prepared financials that document your company’s earnings and cash flow? Financial statements include, but are not limited to, balance sheets and income statements.
Not having proof of a company’s financial history is a major red flag for business buyers. The average bank in Canada requests 2-3 years of company financial statements to provide loans to interested buyers. Buyers actually want to see financials that date back 3-5 years. This is to rule out the risk of buying a company with poor profitability and scalability. Financial statements provide crucial information to determine the strength of a company’s foundation for its future. Financials also help determine the sale value of a company.
If your business does not already have a data room, it’s time to build one. Physical and digital data rooms are secure locations used to store and share confidential files and business information. Advisors use data rooms during the due diligence phase of acquisitions. They are useful when sharing tenders, performing legal transactions, and conducting audits. Having a data room will help speed up the acquisition process. It will also entice a buyer to choose your company over one that isn’t prepared. Read more about data rooms here!
2. Think About Customer Concentration
Buyers want to see a good distribution of sales between a company’s customers. When a company relies on a few key clients, this is a risk for buyers, especially if those clients are not retained after the sale. If any single customer accounts for 10% or more of your revenue, your company has a high customer concentration. If this is a concern, focus on diluting your customer base by landing new client contracts. This will de-risk your company in the eyes of an eager buyer who is looking to grow a business over time. They will feel confident knowing that the company has a sustainable client base.
3. Recognize Owner Reliance
Let’s face it. Most small business owners get their hands dirty every day to keep their businesses going. It’s a luxury for a business owner to feel secure enough to step away. There is value in knowing that your staff and operation can run things smoothly in your absence.
When getting ready to sell your business, it’s good to be aware of how reliant the company is on you. Can you take a vacation for more than a few weeks or days at a time? Is the company’s operation dependent on all the information you keep in your head?
It’s a risk for a buyer to see that too much of the company’s success rests with you, the owner. The question on a buyer’s mind is: if I buy this company, will it continue to perform without you?
4. Educate Yourself on Valuation
Think about the dollar value of your business. Don’t let your first instinct or desired sale price cloud your perspective on what your business is truly worth.
One of the main reasons why businesses don’t sell is unrealistic buyer and seller expectations. According to the BDC, it’s “common for business owners to have a different value in mind than potential buyers… [which] can lead to disputes, derail negotiations or affect post-transition plans.”
Before you sell, educate yourself on business valuation. Hire a business valuator who can help determine the objective value of your business. Their professional opinion will help set realistic expectations. They will pass on knowledge so you can assess fair and sensible offers. A valuation will help “identify weaknesses in your company, find ways to boost its value and take steps to minimize your tax liability before a sale.”
If you’re not satisfied with your current valuation, you can learn how to improve the value over time. Here’s a hint— increasing value is not just about increasing revenue.
5. Envision the Future
Buyers invest in companies with bright futures. The appeal of purchasing a pre-existing business over starting a business is the security that the company is established. Buyers are looking for successful businesses that will continue on upward paths. Buyers want businesses that show a variety of growth opportunities. They also look to industries with the same sort of growth promise.
Have you reached your business goals? If not, that’s ok, how can you show a buyer that their goals can be achieved through the acquisition of your business?
Develop a strategic plan for your company. By future thinking, you help a buyer visualize their path to taking over your business. This gives them solid drivers for why they should invest in your company and buy your business. Check out this article for useful future thinking strategies.
When a buyer knows that a particular business is the right fit for them, they want to get the deal done—and done fast. As a business owner, it’s important to put yourself in the position of the buyer. By doing the work, you can eliminate major pitfalls and stumbling blocks that prevent buyers from making moves to buy your business.
About the author: Village Wellth
Village Wellth is a digital platform serving the small business acquisition space; where sellers can access the right buyer, faster. To browse buyers and businesses for sale visit www.villagewellth.com.
