Business Valuation Issues When Selling Your Business
Before you embark on selling a business you should consider the variables in your industry that most impact business valuation. For most small businesses, it is usually increasing revenue, profit and margins. There are other real issues to consider though that can have a real impact on a business’s valuation. Before you list your business for sale please take a hard look to see if you have done everything you can to maximize its valuation and if there are any ‘quick fixes’ that you can undertake to assist you. All too often, business owners decide that selling a business is what they want (or need) to do and rush too quickly into the process.
Some issues to think about when selling a business:
How do the financials present?
One of the first things that a potential business buyer will inquire about is the financial performance of the business. In most cases a buyer will be looking for typical things like increasing sales, profitability and improving margins over time. This is not always the scenario for all businesses though. We are not suggesting that you alter the financial results of the business in any way but it would be advisable to do some analysis in order to properly tell the story of the business and detail its past performance. For instance, if sales have risen only moderately during the past 2 years, is there a reason behind this? Perhaps a key supplier went on strike or perhaps you re-tooled your business to launch a new product or service? A buyer will certainly do their own analysis of the financial results of the business but try to mitigate any possible unwarranted ‘red flags’ by doing some initial analysis of your own in order to paint an accurate picture of your company. This is something that a business broker can help you with.
What condition is your business in?
By this we mean the physical shape it is in. A clean, tidy and well organized business has a distinct advantage over a similar business for sale that is not. Take the time to organize your premises. This will significant help you in selling a business.
Is your equipment in working order?
If you are selling a business that requires machinery to operate please ensure that it is working properly and that it is serviced. Broken machinery is a red flag to buyers.
Are your books organized?
Do you have accountant prepared financial statements?
Do you have everything in place that a business buyer will ask for eventually (such as income tax returns, Ontario retail sales tax returns, bank statements, AP and AR aging schedules, inventory lists, equipment lists, employee information like job descriptions, and so on). A well organized seller is a positive sign for any business buyer.
Are you ready for the transition?
While you may hold the perspective that you are selling a business, the buyer is mentally preparing to buy a business and embark on a new journey. He or she will be thinking about running the business after the close. Offering support after the transaction will assist you in the sales process and potentially impact the valuation. Try to think about how you can best do this. Perhaps a 2 – 3 week training period makes sense? Perhaps you can properly document important operational issues to pass on to the new owner after the business sells. Planning ahead to assist a business buyer in the transition will go a long way in helping you to sell your company.
Selling a business is a process that requires careful planning and a sound strategy. The above points are but a few of the issues you will encounter when you start the selling process and are meant to serves as issues to consider to assist in increasing the business valuation for when you sell your business. Talk to a business broker to learn more about the business sales process and to a business valuation professional to learn more about valuing a business.