Most business owners plan to sell their company someday down the road. If you own a business, but don’t plan on selling for at least a few years, you are in a good position to start preparing it now. Getting a business ready to sell can take several months to a few years. Being prepared not only gets you ahead of the game, it also allows you to speed up your exit plan if you need to. If you’re not familiar with the sale process, here are a few important tasks to focus on.
Establish a Timeline
Determine when you plan to leave the company. This will help you to detach yourself from the business in phases and smooth your transition. A professionally developed exit strategy will help identify your goals, the strengths and weaknesses of the business, and a timeline for your departure. The timeframe for your exit should be flexible. If market conditions are good or you’re ahead of schedule, you may want to try and sell early. Whereas if you hit an unexpected snag, you may need to adapt your plan for a later sale. Your exit plan should serve as a roadmap to your eventual departure that helps guide all your decisions.
Organizing What You Need
Whether you plan to have a family member, employee, or a buyer take over the business, the transition will require some preparation. You will need to gather various documents that are critical to the company’s operation. This includes financial statements, projections, and key agreements. You should specifically focus on the following:
- Formation documents
The documents you filed when you first started business. You may have formed an LLC, S-Corporation or C-Corporation. You will need this to officially transfer ownership.
- Profit & Loss statements
Gather them for at least the last 3 years. If you use business accounting software, such as QuickBooks, this should be easy to export.
- Lease agreement
If you lease the space in which your business operates, you will need a copy of the agreement. Also plan to discuss lease transferability with your landlord.
- Cash Flow statement and balance sheet
The cash flow statement will help buyers understand how your company generates and spends cash. The balance sheet will summarize the business’s assets and liabilities.
- Business tax returns
Gather them for at least the last 3 years
Include estimated revenue projections for the next 3 to 4 years. Buyers will want to understand the logic behind the projections, as well as potential projected expenses.
- Key agreements
Besides your lease agreement, this includes contracts with suppliers, customers, and employees. It also includes any loan obligations.
Obtain a business valuation
Knowing the true value of your company is an integral part of your plan to sell. It will help you determine if the business is positioned to maximize transferable value and if you can afford to sell it. This will give you an idea of what areas of the company can be improved so you have a target to work towards. Having a high value business will help you to attract premium buyers, give you more power in negotiating and improve the odds of meeting your exit goals.
Can the business operate without you? If not, the transferable value of the company will suffer. Transitioning to a strong management team will greatly increase its value and reduce any perceived risk. Many buyers are investors who do not want to run the business themselves. Start grooming leaders that have decision-making authority to prepare the business to run without you.
If you haven’t already, start documenting essential business processes and key contacts. You may know everything it takes to run your company successfully, but other employees may not. In the short term this will support management as they start to assume more of your responsibilities. In the long term, you will help transition new ownership and help them to avoid mistakes.
To survive the due diligence process, your business will need to maintain impeccable financials. By the time you are ready to sell, you should have at least 3 years’ worth of financial statements that tell a good story about your company. If you’re not quite there, you must begin shoring up your back office and financial records now.
Focus on cutting frivolous expenses and start moving personal expenses that the business may currently be covering away from it. Review profit & loss statements to see which services and clients are the most and least profitable so you can focus on expanding revenue channels with the strongest profit margins. If your business supports it, start focusing more on growing income coming from recurring revenue streams rather than transactional ones.
Finding the Right Support
While other professionals can help walk you through the various parts of selling a business, only one can guide your through the entire process. A business broker can help you to establish an exit strategy, perform a business valuation, confidentially market the business, and negotiate on your behalf. They have lists of qualified buyers who are already looking for businesses to invest in. A broker is a buffer between you and any potential buyer. Establishing a relationship with one well ahead of your exit can help you to properly shore up value detractors and prepare your company to sell.
If you are planning to sell your business within a few years and would like to slowly transition away from your duties, Corporate Investment Business Brokers (CIBB) can help you. We have been working with Southwest Florida business owners to formulate their exit strategies and sell successfully since 1986. We are willing to stick with you through the long haul, so even if selling is not in the near future, we can guide you through creating an exit strategy and preparing for your eventual departure. Contact us to obtain a free, no obligation business valuation and find out where you stand.
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