Know how the value of your business will be calculated by a prospective buyer. You will be able to concentrate on the elements of your business that will be worth the most when the time comes to sell it.
Not only should you look to increase revenue, you should reduce discretionary expenses.
> Build consistency in earnings and growth.
> Adjust owners’ salaries to that which could be paid for similar services to an unrelated person.
> Remove salaries to family members and perks that would not be paid by an investor.
> Adjust rent paid to a related entity that may be higher than market rent.
> Clearly define capital improvements that have been written off on an accelerated basis.
Prepare solid projections
No business sale will take place before a prospective buyer gains comfort over your financial projections. Projections need to be based on the history of the business adjusted for reasonable expectations. No one believes a "hockey stick" presentation, where business that has been flat for a while suddenly takes off (e.g. __/).
Whether looking at cash flow, earnings before interest and taxes (EBIT) or earnings before interest taxes and depreciation and amortization (EBITDA), the buyer must be able to rely on the accuracy and reasonableness of the numbers.
Secure net asset values
Mitigating the necessity of projecting the financial future, are the verifiable assets of your business including real estate, equipment, inventory, customer lists and contractual relationships.
> Sell off unproductive assets and replace them with newer, more efficient assets.
> Convert old inventory to cash and use the proceeds to reduce debt.
> Adjust or writeoff uncollectible accounts receivable.
> Replace assets with questionable value to a buyer with those having real value.
Clean up potential liabilities
Business sales are often changed to a sale of assets because the buyer chooses to avoid the risk of taking over unknown liabilities of the company they are seeking.
> Settle product liability claims.
> Settle employee lawsuits.
> Complete tax audits and disputes.
Review your succession plans
Buyers want to know the extent to which the reliability of earnings and cash flow are dependent on you, the current owner. The more the business relies on any one individual (rather than a team of experiences managers), the more a prospective buyer would be willing to negotiate an employment contract rather than the purchase of the business as a whole.
> Develop a management team that transcends the current owners.
Understand the standards of value and methods of valuation and which one(s) are most appropriate for your business.
For a more complete discussion of these issues, I direct you my other blog posts on standards and methods of valuation.
Be an expert in your business and hire an independent valuation expert to perform the valuation.
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