Planning ahead can bring rewards when selling a business

By Sheryl Brake, CPA, CVA

A business can be a significant financial asset and an important or sole source of retirement funds; but often owners decide to sell their business without considering the pre-planning that needs to take place before a sale can be consummated or even considered. The difference between getting the most from a sale and getting the minimum really depends on how “fat” the “pig” is. To get the most from a sale, it is important to not only work with a team of professionals, but also understand the factors that drive the value of a business.

Many owners don’t know their exact retirement goals or what it will take in cash to reach them. They aren’t sure how much their business is worth in cash and they don’t know the best way to maximize the income stream generated by their ownership interest.  An important first step is to determine what you want and need, and what you have in order to develop an exit strategy.  Initially, establish business value. If you need cash from the sale, then transferring the business to a third party (as opposed to family members) may be the best outcome as third party buyers typically have cash to purchase the business. Begin with a preliminary estimate of what your business is worth. A qualified professional can assist here and will help determine whether the business is saleable, and whether sufficient cash will be generated to meet exit strategy needs.

Where business value falls short of the owner’s wants and needs, the owner must create that value within the business before the sale. Similar to selling a home, paying attention to what attracts buyers will go a long way when preparing to sell your business, and will attract buyers willing to pay premium prices.  Management, operating systems, established customer base, aesthetics, financial controls and cash flow are key essential drivers of value that potential buyers look at to either reduce risk or increase return, and for which they will pay a premium if perceived to be attractive.    

A business dependent on the personal relationships and reputation of the owner, or one that has no management team in place, will be less attractive to a prospective buyer.   It may be necessary to develop a solid management team to ensure that customer relationships and company reputation will remain intact, and/or arrange for the owner to stay involved after the sale to help transfer the relationships.

Operating systems include procedures (electronic or manual) to generate revenue, control costs and track customer identification and product or service delivery. Efficient operating systems in place mean that operations will not break down, and the buyer will be able to step into the business with less effort than if those systems were not in place.

An established, diversified customer base insulates the company from the loss of a single customer, and from the buyer’s perspective means less risk. Ideally, no single customer should account for more than 10% of total revenues. Ensure your business has the organizational capacity to take on more customers, thereby creating a more diversified customer base, by reinvesting profits.

Appearance helps, as anyone who has sold a used car knows. The buyer wants to know if the seller has made the required investments to keep the business going, whether necessary capital improvements have been made or will be required in the future. A clean, well-organized facility generally communicates a clean, well-organized business. A few thousand dollars in superficial improvements will increase interest and make your company more marketable.

From the buyer’s perspective, financial controls signal financial due diligence and complete confidence in the company’s historical performance. Lack of financial integrity means reduced purchase price, or at worst, no sale at all. To document effective financial controls, historical financial statements should be prepared by an independent, established CPA firm. Include review level statements and, if appropriate, audited financial statements (if you have begun the sales process).

Cash flow is the ‘bottom line,’ and what ultimately drives the value of your business. Buyers want to buy cash flow, and are willing to pay a premium for cash flow which they expect will increase after purchase. Historical cash flow should show substantial and growing cash flow. To increase cash flow in preparation for sale, review, and if necessary, upgrade management, operational systems, customer base, appearance, growth strategy and financial controls.  A qualified business advisor can help facilitate the process of implementing the necessary steps to ensure cash flow goals are met.

Selling a business involves planning and collaboration with a team of qualified professionals. Exit planning and strategic development needs to be discussed and implemented well before you want to sell. Getting top dollar is dependent largely on the efforts that owners take to adopt and implement the right tools and techniques. With proper planning and attention to value building characteristics, you will get the most from your business when you sell. Fatten the pig before you sell, and then do a jig all the way home.

Sheryl Brake, CPA, CVA, is a tax partner and valuation specialist in the Boulder office of Gordon, Hughes & Banks, LLP. She can be reached at (303) 443-1911. This article appeared in the March 2, 2004 issue of the Colorado Real Estate Journal.