Originally published in American City Business Journals
By Mark Abell
Entrepreneurs who have built businesses with years of blood and toil often find that selling to a good firm doesn’t happen overnight.
Indeed, it takes three to five years of careful preparation, including doing such things as maximizing cash flow and putting in place the next generation of leaders.
As General Electric founder Thomas Edison once said, “good fortune often happens when opportunity meets with preparation.” For small business owners, that preparation is like selling your house — paying attention to some crucial details can help you get top dollar for your business. And decisions made years earlier can have a major impact.
The good news is that the market for selling small businesses is hot. In the first quarter of 2017, 2,368 deals closed, up 29 percent from a year earlier, according to BizBuySell’s Insight Report. The average multiple of cash flow, increased 1.6 percent to 2.35 and the average multiple of revenue increased 2.5 percent from 0.61, emphasizing how important it is for small business owners to boost profitability before listing their business for sale, the report said.
The bad news is that the vast majority of businesses that want to sell can’t find buyers — only about one of every five listings on BizBuySell’s online marketplace for small-business sales closed a transaction in 2016.
Here are five things owners can do to give their business the best chance of finding a buyer:
1. Maximize financial metrics
Creating cash flow that will continue after the business is sold is the best way to build significant value. Businesses must maximize use of labor and capital assets so that they operate efficiently.
Businesses should make sure their financial statements are above reproach and that there is no financial window-dressing aimed at convincing a buyer that the company is worth more than it actually is.
Financial statements that make it hard for buyers to understand the business and how it can be profitable are deal breakers. Making sure the firm is financed on a permanent, sustainable footing with working capital lines and financing for fixed assets that carries a reasonable interest rate is crucial, because it signals to the new buyer that the business can attract necessary funding.
2. Think about succession
A lot of businesses aren’t appealing to buyers because too much of their value is tied up in the owner’s work. Smart owners should consider a succession plan so that the business has leaders after the owner leaves. If the business cannot run effectively day-to-day without the owner, then it has no real value to buyers.
Business owners should ask if they can take a month’s vacation and expect the operation to be humming when they return. If the answer is no, the company needs to develop new leaders.
3. Diversify
Too many businesses, particularly consulting firms, rely on revenue streams from too few clients — something that would make a new owner vulnerable if those relationships were the result of connections to the original owner.
Companies should work to ensure that they have broad enough customer bases where if any single client or vendor were lost the business could still thrive. If one customer accounts for 20 to 25 percent of revenues, it’s a problem, and if a single client is responsible for more than 40 percent of sales, it will seriously undermine the likelihood of a sale.
4. Look ahead
Selling your business may be the end of your era as owner, but a purchaser wants to see plans for the future that identify opportunities to create growth. Companies with sales and marketing teams that are developing plans for new products or services or that are considering expanding into new markets will be easier to sell.
The business needs to have pep; showing where the business can be expanded makes valuations more attractive.
5. Remember curb appeal
Just like selling a home, curb appeal matters. A business that appears well maintained is easier to sell than one with peeling paint and machines in need of repair.
Businesses that look to be neglected are only attractive to turn-around specialists who pay discount prices. Conversely, companies with excellent repair and maintenance contracts that appear to be well-managed, viable concerns fetch premium prices.
In the coming decade, an estimated 10 million small-business owners hope to sell their company to help fund their retirement. That makes it more important than ever that they take the right steps to make sure that all their hard work pays off when it comes time to sell.
Mark Abell is senior vice president and SBA division director at NBH Bank , Member FDIC, Equal Housing Lender. NBH Bank serves clients through Bank Midwest, Community Banks of Colorado and Hillcrest Bank.