"7 Critical Points Every Business Owner Must Know Before Selling their Business"
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This should be obvious but I come across this time and time again. I guess if the small business owner is not financially savvy - and usually they are not - they focus on what has made them successful and skimp on the accounting. But this is a mistake. Take the time to set up your accounting and spend some time with your CPA so you know what you are looking at. Do this early in your business lifecycle. Like any small business owner, I'm sure you'll want to expense as much as you can so you minimize your taxes - just make sure you can identify those items that are discretionary (e.g. Not absolutely necessary to the operation of the business) so they can be segregated later.
It is amazing how some business owners are able to bury their profitability so deep in their financial statements that no one can find it. This doesn't just apply to those "cash" businesses with revenues of $200K a year either. I recently analyzed (I suppose "analyze" is what I was doing as I tried to make sense of them) a company's financial statements - it was a nice niche distributor with over $3 million in annual sales. I looked at every expense line item in Quickbooks and I couldn't find more than $80K in cash flow (discretionary earnings including the owner's salary). Granted there are plenty of companies with marginal profitability - but I know this isn't one of them. (And not just because of the vehicles the owner and his wife are driving.) I'm just having a hard time with finding the earnings. I'll take it to a deeper level and I'm sure I'll find them, but then we have to convince potential buyers that the company is worth what we say it is, which is that much harder because of the poor quality financials. SO:
In a survey conducted by a Midwestern university several hundred business owners were asked "What are your plans for business succession - to pass the company on to your children/key employees or sell to a third party?" Seventy percent (70%) responded that they planned to pass the business on to children/key employees and 30% responded that they would sell to a third party. Several years later these same business owners were contacted. Of those that transferred ownership, about 30% passed the business on to children/key employees and about 70% sold to a third party. The reality was that the vast majority sold to a third party even though their original intent was to pass it on to children/key employees. There are several reasons for this - the major reason being that it creates the biggest payday.
So now you plan to sell to a third party in 2-3 years. What are you going to do after you sell your business? Will the proceeds from the business support that? Do you know the type of buyers that may be interested in acquiring your company and what they're looking for? Is your company ready for sale? What can you do to maximize the value of your company in the eyes of prospective buyers? In summary, do you have a well thought-out plan? Transferring ownership of your business may be the biggest financial event of your life - you should have a plan.
Another survey, this one by ROCG, an international consulting firm, asked several hundred business owners who wanted to exit within 3 years if they had a plan. Eighty percent (80%) responded in the negative. The same survey asked "what is the most important objective in the sale of your company?" Eighty percent (80%) wanted to maximize the transaction amount. A good strategic exit plan gives you the best chance of receiving the maximum transaction amount.
Conversely, lack of a plan can cost you a lot of money. How do I know? It happened to someone I know. See the blog below titled "Strategic Planning".
