How to know if your business is sellable

Welcome to business tips with Michael Tobian. Today’s discussion is entitled “Is My Business Sellable”

As a business broker, one of the unfortunate things I sometimes have to tell a prospective client is “your business really isn’t sellable”. Often, they are shocked to hear this. There are lots of other fun little surprises clients sometimes get to hear about the value of their business or some of the challenges they will face in selling it. Many of these challenges can be avoided with some planning ahead. I’m going to go over what things make a business sellable and attractive to potential buyers. My hope is that if you want to sell your business one day, you can start thinking ahead and make some changes if needed. When it comes time to sell your business, I want you to have a business that is sellable and attractive to buyers.

Here are the things I’m going to talk about today:

- Profitability

- Good books and records

- A Turn Key Operation

- Separating yourself from the business

- Customer Concentration

- Cutting unnecessary expenses now to avoid having to explain them away later

Profitability

This first one may seem obvious but I believe it is the most important thing that will make your business sellable. Business that are profitable and flourishing are very attractive to buyers. Sometimes when business owners decide to sell their business, they back off of running it and spend less time and effort with it. This is the opposite of what you should do. When you decide to sell your business, I suggest finding a very good, aggressive and motivated business broker to sell it for you and spend all your energies keeping the profitability up. Let me tell you a very common tale that I experience as a Business Broker. Seller lists their business for sale with me. We work very hard to put it on the market and are engaged in our efforts of finding buyers and getting them through the buying process. Mr. Seller backs off of his efforts in running his business. We have a buyer that is very interested but perhaps the process is taking longer than expected. Buyer asks for updated financials. They show a decline in business performance because the Seller relaxed their efforts. Buyer gets spooked and is no longer interested. New buyers are less interested because all of a sudden this business that was performing well is declining. Seller decides to lower the price to gain interest. Seller finally sells their business for less than they hoped for, or, they never end up selling their business because they never adjusted their price in proportion to the decline in revenue. Buyers are not typically excited about businesses that have a decline in revenue. Let’s look at a contrary example that I also ran into a lot. Seller lists their business for sale and while we spend a full time effort selling the business, they are spending a full time effort keeping their business going strong. As buyers as for updated financials, they are excited to learn that the business is doing even better than expected. More buyers become interested. Competitive offers come in. Maybe full price or even over full price offers are submitted due to the competitive nature of this busines that is growing. Which situation would you prefer? When you are ready to sell your business, think of it like a race. Put that extra effort in at the end and keep your business going strong. You will likely end up with a higher chance of selling and perhaps with more money in your pocket in the end.

Good books and records:

I believe that Keeping accurate and well documented books and records is the second most important thing you can do to make your business sellable. The first business I ever listed as a business broker was a restaurant that was doing quite well. Unfortunately it never sold because the owners kept terrible books and records and they were taking cash and not reporting it. Their financials looked awful. The business seemed to be doing very well but they couldn’t prove it. Imagine you are a buyer and you have submitted an offer and are in the process of due diligence and the financial records are missing and all over the place. You are unlikely to move forward. If you are thinking of selling your business, clean up your books and records. Perhaps consider getting a bookkeeper and if you aren’t reporting your income, start doing it. Of course you should be reporting your income anyway but if you decide to sell your business, most buyers are going to want to look at tax returns for the past three years or so. If you are aggressive in your deductions, that is easier to explain to a buyer than unreported revenue. If you purchased some equipment that you never used or a business vehicle that is non-essential, most buyers can understand that and will accept those adjustments to your tax return numbers; however, you are going to be hard pressed to gain the trust of a buyer if you tell them “I lied on my tax returns”. So, start cleaning up your books

A Turn Key Operation:

Buyers are interested in business that are turn-key. In other words, ready for them to take over. If you are interested in selling, put process in place that make it easy for a buyer to take over. If you don’t have some kind of SOP or manual that explains the processes that you and your employees use, then I would suggest putting one together. A buyer needs to feel that they don’t need you to run the business. Ask yourself how comfortable you would be taking over the business if you were coming into it as a new buyer and start to implement those things Separating yourself from the business It is much more difficult to sell a business that can’t be separated from the owner. Look at your operation and imagine how it would run without you. Are your clients calling you on your cell phone? Is their relationship with the business only dependent on their relationship with you personally? Are your customers attached to you personally? If you left the business, would they still use your company? Are you personally doing all the sales? Do you have specific knowledge or skill sets that are unique to the success of the business. In other words… Is the business just YOU? If so, fix that because a buyer isn’t going to want to buy a business when it’s success is dependent on the previous owner. I’m selling one of my personal businesses right now and that aspect of it is easy. In fact it is one of the attractive things about the business. None of the customers even know I exist. The staff do everything and we have processes in place. Very easy for this buyer to take over. If you have this problem, start introducing your clients to your other employees. Get other people in the company involved in the selling and fulfilling process. See if you can get to the point where your customers aren’t going to really care if you end up leaving. Each business is different and you know what these issues are in your business, so start making some moves to gradually solve this issue.

Customer Concentration

If a high percentage of your revenue comes from one customer, or a small number of customers, you have a potential customer concentration problem. Maybe those relationships are very secure and you don’t feel it’s a problem in your mind. A prospective buyer will be very nervous of this. They are paying you a price based off of your business profitability and performance. If that customer leaves, all of a sudden they over paid for your business in their mind. They will think of it as money gone down the trash. They might have a loan that they now can’t make the payments on. Buyers view a high customer concentration as a big risk. In these situation, buyers often give creative offers that might have some kind of earnout or performance based pay out for the business. If you are looking to be cashed out, this could be a real bummer for you. This is a tough problem to solve because you definitely don’t want to lose your big customer but you might want to consider how to lower your customer concentration by getting more customers, or, when it comes time to sell, realize that you may be asked by a buyer to consider some creative ways to get the deal done that lessens the Buyer’s risk. Cutting Unnecessary Expenses Now to avoid explaining them away later If you are a business owner that doesn’t run your business very lean, you may want to put some effort into doing this or it may affect your businesses value when it comes time to sell. Let me give you an example. Let’s say you do some advertising that isn’t really effective. It doesn’t affect your sales really. You just throw some money at it anyway. When it comes time to sell your business, you want to prepare an adjusted income statement that makes a note of this expense, telling the buyer that it is unnecessary and doesn’t affect sales. If you can convince a buyer that it is an unnecessary expense, it would show the adjusted profit higher for the purposes of a valuation. A buyer has no way of knowing whether or not you got any sales from this wasted advertising so they can’t consider it an add back or adjustment to the expenses. Those advertising dollars may have been wasted but now those wasted advertising dollars just lowered the value of your business. If you are looking to sell your business in the future, I would look at how you spend your money and get rid of the waste. There are items that you spend money on that are legitimate add-backs into the profitability from a valuation stand point, but some expenses are unconvincing. I’ll be doing a video that covers this more. Okay, those are some of the main considerations in making your business more sellable. These are great things to talk to a business broker about. Feel free to reach out to me if you have any questions. My team and I would love to help you sell your business. You are going to be hard pressed to find a better team of business brokers anywhere than us. You can reach out to me on my website in the description below.

Thanks so much for watching and have a great day!