- July 21, 2011
Preparing a business for sale forces the owners to solve all the lingering issues in a business. More business owners should be ready to sell their businesses at all times, in order to maximize their current results. While this seems counter-intuitive to both growing businesses and family owned businesses, it is sound advice.
To get the highest price possible, businesses need to have a clear history and a growing future. Business owners need documented processes in place. The clear test is when a company can operate without the owner showing up to work. Owners should work on the business, not in the business.
The things that happen inside a company that is preparing to sell:
- Intellectual property issues get resolved
- Clear employee manuals, operating manuals, and marketing strategies
- Solidly profitable, with a 2-5 year track record of profitability
- Marketing and product plans that show a solid path for the coming years of revenues
- Budgets are followed with costs declining and revenues rising
Who Buys Businesses?
The normal acquirer is a larger company that wants to grow faster than organically in that product or service category. They normally can leverage their distribution and back office functions for the sales to be accreditive directly to the bottom line at the marginal rate. That means it costs less for a larger company to sell the same products or services because they can knock out one of the budget lines from the acquired company: sales dept, warehouse, accounting, production, or marketing.
How Long Does It Take to Prepare?
It typically takes 3-6 months to create and fulfill an offering memorandum with all the key components in place or in process. It starts with an assessment of the business and its shortcomings to be salable. Next processes are documented, prior year numbers finalized, and budgets prepared for coming years. Finally any lingering issues are resolved or disclosed.
The Sale Process
A company that has been approached about selling itself presents an offering memorandum to the potential buyer. The buyer sends an offer letter. The selling company accepts or counters, and it goes back and forth until an offer is accepted. The buying company does due diligence to confirm the presented information is correct, and the deal closes.
Why Prepare Now If We’re Not Ready to Sell
The purpose of preparing is that you run your company at its optimum because you would want to sell at a high point. If you are always ready to sell, when an offer comes in you can act quickly and get the best possible price. The option of taking the next 5+ years earnings right now without having to go through hard work and financial risk is very appealing to many weary business owners.