John B. Charleston, III, MBA
It took me three years to actually come to the point where I was ready to sell my business. Along the way, I was looking at the end game and thought “What do I need to do to make my business attractive to another buyer and get the biggest payday for it.” I looked at a number of different things, and although I didn’t know it at the time, this is what all good business brokers will tell you:
Increase Business Revenue
As a franchise owner with a protected territory, I had to figure out a way to grow my revenues and increase profitability. I made good money running my business, we never wanted for anything, but in order to make it more attractive to buy, I knew that more revenue and profits would make it that much more attractive.
I talked to other franchise owners in our organization that were more successful than I was and learned that they all had one thing in common. They had a storefront. They all told me that they took half of their advertising budget and put that towards a rent budget. They said that their showroom was the best advertising they ever paid for. So I put in the time and energy to find a location, build it out and grow. I saw my sales grow 25% the first year it was open.
Diversify Your Business Customer Base
Not all businesses can diversify their customer base. In my case, I decided to go after more commercial business. Ninety percent of my customers were residential clients. My average sale was $1500. My average sale for commercial clients was $3500. So I made a concerted effort to target them in my advertising (and having my showroom helped) and I grew that to 30% of my business. I was able to close less deals, and work less hours by increasing my commercial client base.
De-Emphasize Your Personal Role In Your Business
My business was unique, it was a man with a plan model, and it was more of a one man show franchise (originally). However by bringing my wife Amy onboard in the 2nd year, I was able to delegate all the administrative and 80% of the office work to her. Then by hiring an installer I freed up another 25 hours a week to focus on growing the business and selling. My next step (if I didn’t sell, was to hire a salesperson to sell so if I was gone, money was till being made). The businesses that sell the fastest and for the best price per SDE, are businesses that don’t need the owner there running things. The more your business is dependent on your success, the harder it is to sell.
Develop A Strong Business Management Team
You can look at this one of two ways. The first scenario is your team of advisors. I had a business coach, a CPA, a financial planner, attorney, and a few mentors to help me when I was stuck. I knew that I could call them and get good unfiltered advice. The second scenario is that you may need to hire a production or sales manager, maybe you need an in house accountant or book keeper, maybe you need an HR manager. Look at your business, think about where you spend time not making money and find someone (either in house, or contract it out).
Reduce The Amount of Family Members Working In The Business
Some business owners have family working part time, but paying them full time. Write up their job descriptions, so buyers know what they do. Your broker will adjust your profit and loss statements to account for the extra money you pay them, but is not really needed. You may also be over paying them for what they do. You may be best off having them find another job and hire someone that will stay on with the new owner at a market pay rate. The fewer people that need to be hired by new owner’s the better. Sometimes you can replace people with technology. In my case, my wife answered the phone and helped book appointments, order product, etc. I couldn’t just replace her at the time, she was a vital part of the business. However, we didn’t want to increase her hours. So we used a combination of outsourcing (answering service that helped book appointments) and technology (new version of QuickBooks that imported most of our banking information to cut down on the time it took to do book keeping) and a software based ordering system so my sales could go directly to the vendors.
Reduce The Amount Of Owner “Perks”
Having a clean set of books is vital to marketing and selling your business. The less you need to “explain” to a buyer about your expenses that are not vital to operating the business the easier due diligence will be and securing bank financing. I didn’t run much thru my business; my accountant was overly cautious. So, I don’t have any good personal examples. However, I talk to business owner every day that run everything thru their business. I had a friend that had $60,000 in meals and entertainment on his books. I know he was not taking out clients. That family vacation you took and then use as a write off because you stopped at a similar business to check out their facility. Don’t buy your kids new phones every year. Stop paying for the gas in everyone’s car. Don’t pay for all of your auto insurance for the family vehicles. The less non-essential expenses you have running thru your profit and loss statement the better. More cash flow creates more value. If the standard SDE (Seller’s Discretionary Earnings) multiplier for your type of business is 2.5x SDE, for every dollar you save and put back into cash flow, you get $2.50 in value. So let’s say you are running $50,000 in expenses thru the business that are just personal expenses, but your CPA is allowing you to write them off as business expenses to reduce your net profit and taxes, that is an extra $125,000 in asking price for your business. I know in the year(s) leading up to the sale you will pay extra taxes on the $50,000, but you will make it up when you sell. I am not a CPA and I did not stay at a Holiday Inn Express last night, talk to your CPA and financial planner for advice on this.
Sell Or Remove Unnecessary Or Personal Assets
Do you have 3 personal laptops on the books for the kids that you have depreciated? Do you have a car loan thru the business on your wife’s car? Get them off your balance sheet for the business. It is one more thing to explain to buyers. I was guilty of it. I had an iPad and two laptops at home that were “business” assets. I know owners that buy condos thru their business. Get them off the books before you get ready to sell.
Reduce Business Inventory To A Normal Level
We didn’t have an inventory per say in my business. We were a custom order business, so we put an order in when client bought from us. However, we had tons of parts collected thru the years for repairs. After 14 years I had so many old parts that would never get used, I threw them away. Think about it as getting your home ready for sale. De-Clutter! The new owner does not want old inventory or parts that have no value. Write it off and throw it away or put it up for auction or find a discount wholesaler that may want it for pennies on the dollar.
Other Actions To Prepare Your Business for Sale
Website, Facebook, Google my Business Pages (update). Write operations manual and document jobs and procedures, have an employee handbook (you can outsource that to HR firms), Negotiate lease renewals, eliminate unnecessary/unproductive employees, collect A/R and write off bad debts. I had some bad debt on my books from customers that were never going to pay, I wrote those off. I made sure to keep my website fresh with customer reviews, keep posting on Facebook and my GMB page. Also document everything you can for your business. My franchise had good documentation for me to use, I was lucky because I sold my business to a franchisee already in the system. But the more you can have your systems documented the more valuable that is to a buyer. I have a friend that owns restoration company and his company is so well documented, that I think a new owner could come in and realistically learn the business in two weeks.