March 8th, 2011 David Finkel (Taxloopholes.com Advisor)
Before I share these 5 insights with you, I wanted to ask you for a favor. Many of you have already download or read our most recent bestseller, Build a Business, Not a Job: How to Build Your Business to Sell, Scale, or Own Passively. I hope you’ve pulled some great insights from the book and used the ideas to improve your business.
I am asking that you help us share this powerful book by forwarding on this post (and web link) to your business colleagues and friends who you think would really profit by downloading a free copy of the book themselves. As you know over 40% of the Maui community of business owners originally found us via a referral from a friend or business associate of theirs.
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Thank you for your help in growing the Maui community of business owners!
Okay, on to those 5 insights on selling your business:
One: You’ve got to plan for your sale at least two (and ideally three) years in advance of selling. It takes time for you to improve your margins, reduce your customer concentration issues, etc. If you wait to do this until the time you want to sell you’ll end up with a lot less than you could have.
Two: Pull non-normal expenses out of your business and into a separate business so that your financials are “normalized”. This includes things like that company car, corporate meetings in exotic locations, huge benefits you pay yourself, etc. Sure you could try to explain away these expenses to a buyer, but from my experience they will negotiate hard here. MUCH better for you to only keep expenses in your business you’re going to sell that are normal and will be stable with your new buyer.
Three: There are a lot of reasons why you might end up selling other than just wanting to “cash out.” You might want to find a financial partner who will buy a majority of your business but still retain a sizable ownership stake, and with the new resources your partner brings you can scale your business to the next level. Or you might want to “sell” part or all of you business to your kids. Or you might want to end a partnership. Or…
All of this is to say that even if you don’t think you want to sell your business, you never know. Life happens. And since you will likely only have a handful of businesses you get to sell and the value of the asset will be relatively large, so start now to educate yourself on how this process works.
Four: Start building your selling advisor team at least 12 months before you sell your business. If your business is under $1 million this probably means working with a business broker. If your business is selling for over $1 million (and definitely if it is selling for over $3 million) you’ll probably want to be working with a great investment banker to guide you through the process. In either case you’ll also need a solid business attorney and CPA on your team, and if the dollar value is high enough, you may also need to work with an financial advisor on what to do with your funds after the sale.
NOTE: Having sold several businesses in the past I want to give you one more piece of personal advice that I wished someone had given to me: after the sale, give yourself at least 6 months before you invest the proceeds into any type of aggressive investment. For that time I suggest you choose liquid, ultra conservative options so that you can give yourself a chance to get used to post sale life before you make your next major investment moods.
Yes you’ll be giving up return, but I promise you that you’ll save yourself a LOT from the cost of making a rushed, ill prepared (emotionally and functionally) investment move.
Five: Conduct your “Buyer’s Audit” on your business. No matter what level or stage your business, take some time this month and do a Buyer’s Audit. This means look at your business through the eyes of a buyer. Who might this buyer be? A competitor looking to take over your customer base? A complementary business who wants to make a strategic acquisition? A financial buyer who sees the growth value in your business if you just had some more resources behind you?
What would they be willing to pay for your business? What formula would most likely be used to value your business? A gross revenue multiplier? An operating profits multiplier (the famed “EBIDA” multiplier)? Each industry and business type has a most common valuation method. Learn yours and the factors that most influence which of the range of multipliers your business can command. This will allow you to build your business to maximize its value.
Also, look at what things about your business would be risky for your buyer. Do you have one major customer or joint venture partner that is responsible for the majority of your business? If so, this may concern a potential buyer. Anything you can do over the next 2-3 years to mitigate these risk factors will increase the value of your business in the eyes of your buyer and hence help you command a higher price.
I hope these 5 insights on selling your business help you make the most of your biggest wealth asset – your business.
Again, thank you for your help in spreading the Maui business building insights by forwarding this post (and the link to get their own complimentary copy of our newest book, Build a Business, Not a Job: How to Build Your Business to Sell, Scale, or Own Passively) to your friends and business associates.
We are committed to teaching a generation of business owners
how to build businesses they can sell, scale, or own passively and value your
help in accomplishing this mission.