Selling Your Company: 5 Key Factors Every Small Business Owner Must Know
Selling your company is one of the most significant business transactions in a small business owner’s life. It’s a complex process that demands meticulous planning and preparation to ensure you achieve maximum value and a smooth transaction. Many common mistakes can be avoided by being proactive and staying on top of the most crucial aspects. In this post, we’ll go through five key factors every business owner should consider as a sale approaches.
1. Understand and Maximize Your Company’s Value
One of the very first and most critical steps before a company sale is to gain a clear and objective understanding of what your company is actually worth. Without a realistic valuation, you risk either underestimating your company and selling too cheaply, or overestimating it and deterring potential buyers. Business valuation is not an exact science but is built on a combination of financial performance, future potential, market position, intangible assets, and industry-specific factors.
Why is valuation important?
It forms the basis for price discussions, but it also helps you identify what drives value in your company. By understanding this, you can actively work to improve value-creating factors before the sale.
How is it done?
A professional business valuation takes into account everything from historical revenues and costs to cash flows, market trends, and unique competitive advantages.
Maximize value:
Before you go to market, review your financial history, ensure your processes are documented, and that the business is not overly dependent on you as the owner. Strong cash flow and stable profitability are always attractive.
For a professional and independent business valuation, Bisvalue is a leading provider of business valuations. They can give you the insights you need to understand your company’s value before a sale.
2. Get Your House in Order (Due Diligence Readiness)
A potential buyer will conduct a “due diligence” process, which involves a thorough examination of all aspects of your company. If your legal and documentary affairs are not in order, it can lead to delays, price reductions, or even the deal falling through.
Important documents to review:
- Share register and articles of association.
- Contracts with customers, suppliers, employees (employment contracts, collective agreements).
- Lease agreements for premises.
- Permits and licenses.
- Intellectual property rights (trademarks, patents).
- Insurance policies.
- Minutes from board and general meetings.
Clean slate:
Ensure that any disputes, debts, or outstanding claims are resolved or at least clearly documented. A “clean” company history is much more attractive.
3. Financial Preparation When Selling Your Company
Potential buyers don’t just want to see strong results from the last year, but a trend over time. They will analyze the last 3-5 years’ financial reports to assess stability, growth potential, and profitability.
Normalization of results:
It is common to “normalize” the results before a sale. This means adjusting for one-time costs, owner-specific expenses, or extraordinary revenues that will not carry over after the sale. This provides a more accurate picture of the company’s operational profitability.
Cash flow is king:
Focus on demonstrating strong and stable cash flow. A company that generates good cash flows is attractive as it signals the ability to finance growth and repay any loans.
Forecasts and budgets:
Have realistic and well-substantiated forecasts for future revenues and costs. This shows that you have a clear understanding of the company’s potential.
4. Build a Strong Organization Not Dependent on You
Many small businesses are heavily dependent on the owner/founder. For a buyer, this can be a risk factor. Being able to demonstrate a robust organization with clear processes, competent employees, and delegated responsibilities significantly increases value.
Delegate and document:
Start early delegating tasks and responsibilities. Document important processes and routines so they are easy for a new owner to understand and take over.
Key personnel:
Identify and ensure that key personnel in the company (besides yourself) are motivated and have incentives to stay after a sale. Their expertise is crucial for continuity.
Structural capital:
Review the company’s “structural capital” – i.e., routines, systems, customer lists, brand, etc. – and ensure it is well-managed and documented.
5. Marketing and Matching with the Right Buyer
Having a prepared company is one thing; finding the right buyer is another. A successful sale often hinges on finding a buyer with synergies and a shared vision for the future.
Sales prospectus:
Create a professional and attractive sales prospectus that presents your company in the best possible light – its history, operations, market position, team, financial results, and future potential.
Identify potential buyers:
Who would benefit most from acquiring your company? It could be a competitor, a supplier, a customer, a private equity firm, or a private investor.
Network and advisors:
Utilize your network and consider enlisting the help of a business broker or advisor experienced in company sales within your industry. They can assist you in identifying and reaching the right buyers, as well as guiding you through negotiations.
Selling a company is a major undertaking that requires time and expertise. By proactively working on these five points, you significantly increase your chances of a successful sale at maximum value.
Do you want to delve deeper into understanding business values? Visit bisvalue.com for professional insights into company valuations. An excellent tool for anyone looking to maximize their company’s value.
