As you watch your business grow, it is hard to imagine letting it go someday. However, with future uncertainty, you need to be ready for the inevitable.
When selling your house, a fresh coat of paint and quick renovations can make a difference to the price. However, selling your business is complicated. Remember, the company is an asset comprising of multiple dynamic stakeholders. It is impossible to fix it within a year and fetch a reasonable quote. Besides, any buyer can pinpoint the weakness in the business and your band-aid approach to issues.
If you run your business professionally, you are continually building value. This will attract better offers when you put it on the market. So how do you structure your company for a future selling potential?
1. Maintain accurate financial records
When running a small business, keeping correct financial documents can be a daunting task. Most owners mix personal finances with that of their business. You need to maintain the accounting standards in your financials. You can include your expenses as part of the business costs, however, you need to do it legitimately to keep your records clean.
Your accounts should be accurate. Necessary adjustments like accruals, prepayments, and profits or losses for the period in question must be made to reflect the actual position of the business. A regularly updated balance sheet is also vital for planning.
2. Have a clear vision and business strategy
A buyer is buying the future of your business. Therefore, a clear vision and direction will increase the value of your company. Developing a working strategy takes years of refining your trade and knowing what works. After coming up with a plan, you need to layout the execution strategy. A one-page summary of your business vision, policy, and execution strategy will give the acquirer a clear picture of what they are buying.
3. Put together a strong leadership team
Your management team can guarantee a profitable exit. It is an indication of business continuity in your absence. However, picking a competent management team takes years. You need to select individuals who not only have the requisite skills but also bring value to the business.
Do not jump to anyone with experience in a corporate environment. Their expertise may not be beneficial to your business. Your business requires highly motivated individuals who embody leadership values to take your company to greater heights.
You also need to give them the power to carry out their responsibilities without interference. Their success is proof that your company is not a one-person show.
4. Legal contracts
Are all your agreements formalised? While the lack of formal contracts may not be a deal-breaker for some buyers, it represents your professionalism. Ensure the employment contracts are structured and regularly updated. Legal agreements with your suppliers are also proof of recurring revenue.
The arrangements also need to be transferrable to avoid transition problems. Having legal documentation is evidence of your revenue stream and good business practice.
5. Develop a strong corporate structure
You need to optimise your organisational structure to be reliant on a transferable system instead of employees. While some employees are vital to the success of your business, they can leave anytime.
If the exit of a key employee can shake up your business, you need to mitigate that risk. Find a sustainable system that allows transferability of roles with minimal business interference. A robust corporate structure ensures a smooth transition for the new buyer.
6. Analyse and manage risk
Implementing risk management strategies highlights the stability of your business to potential buyers. You need a system to deal with threats. How do you deal with obsolete stock, doubtful debts, and litigation? A buyer is not after a perfect business, however, you must showcase your ability to deal with risks.
7. Show consistency in earnings
Buyers are interested in cash inflow and outflow. The stability of your income stream increases your chances of getting a reasonable quote. While some acquirers use a balance sheet or profit and loss accounts to determine business earnings, some put more weight on earnings before interest, tax, depreciation, and amortisation (EBITDA). It gives a clear picture of net income without capital expenditures.
It is crucial for business owners to have an exit strategy in mind. Building a successful business and knowing the right time to sell guarantees a lucrative retirement.
By Matthew Hernon is an Account Manager at Dynamis looking after Business Transfer Agents and Franchises across BusinessesForSale.com and FranchiseSales.com.