You’ve decided to sell your business. Maybe you are looking for a successor to buy you out, or maybe you intend to put your company on the market. Regardless, you need to start preparing your business for sale now: a turnkey business will command the best price, and it takes time to button up all the elements that give a buyer confidence to sign on the dotted line. 

We get it. You might be burnt out and ready to exit but taking care to get the best price possible and select the right buyer sets you up for a comfortable future. Here are the steps we recommend our clients take to prepare their businesses for sale.  

Transition to a Turnkey Business 

Entrepreneurs interested in selling their business should aim to make their business turnkey. If a prospective buyer can walk in day one and have a fully functioning business, they are more likely to purchase your company. This involves making sure financial records and statements are squeaky clean, business processes are optimized for efficiency, and the right hires are in place and trained for their positions. We dive into these topics further below. 

Make Yourself Redundant 

If your business is dependent on you, the owner, staying on in a leadership position to prevent the business from falling apart, strategic buyers will see this as a red flag. After all, they want to make the best investment with their money, and if the whole business depends on one individual, they are setting themselves up for a world of hurt if something happens to that individual or they decide to exit earlier than planned. Commonly, the owner is responsible for business development, in which case, having them leave upon the sale of a business is a large issue.  

Start looking at your day-to-day tasks and begin delegating down. Select the right staff to take on these tasks or even look to hire an employee if a significant skill is lacking in the business. Allow ample time to train and acclimate employees to their new tasks for a positive transition. Removing yourself as the “hero” of the business is essential for a successful exit strategy.  

Determine What Sales Price You Need to Sustain Your Life 

Many small business owners approach the prospect of a sale by asking, “What is my business worth”? Instead, for those who have the luxury of time to prepare their business for sale, the right question is:  “What do I need to sustain my life comfortably post-sale?” From there, you make a strategy to reach that ideal number. 

However, if you don’t already know, you need to hire or discuss this transition with a financial advisor. Your financial advisor will look at expected social security benefits, assumed tax rates, and 401K and investment balances with the 4% rule in mind: you should be able to draw 4% from your investments without really touching them. Your advisor will also consider financial obligations such as car loan payments, mortgage, and other living needs to determine what a comfortable life looks like for you. 

With this information in hand, your financial advisor helps you determine the ideal number you need from the business sale.  

Then, working backwards, determine the necessary strategies to reach the goal “sale” number. Let’s say a valuation expert believes your business is worth $3 million currently. However, your financial advisor has determined you need to come out of the sale with $8 million. You need to define a strategy to cover this gap. 

Your strategy may include all or one of these options: 

• Increase sales 

• Decrease expenses 

• Set aside additional savings 

Realistically, you may be able to increase the value of your business to $5 million through increasing sales and decreasing expenses over the course of a handful of years. You may also be able to save $3 million. Through this method, you’ve reached the required $8 million figure. 

Improve Your Business’s Worth 

Once you know that you need to increase your business’ worth, you’ll want to think through tactics. You may want to use Vertical IQ or ProfitSense to compare your EBITDA to industry standards. This metric helps determine if you have a profitability issue. 

To improve a profitability gap, analyze if any of these scenarios could fix margins: 

• Team productivity: is there a specific team that has low productivity? What is causing this dip in productivity? 

• Nonproduction activities: Do your teams need to reduce nonproduction activities such as educational trainings or conferences to increase production hours? Are there software or technology options that could save your team’s time, therefore increasing productivity and efficiency? 

• Pricing issues: Are your prices too low? Are prices too high, costing you customers? Pricing your offering is part science (hint: check your close rate!), part art, so leave yourself time to experiment and adjust.  

• Excess Expenses: Are there expenses going to unused assets? (Think about software or licenses going unused, overpriced insurance, or inefficient travel).   

A business forecast is another essential tool for increasing business worth. A multi-year forecast is not only a tool to showcase projected growth to a potential buyer but also to track progress towards your goals. In conjunction with a solid forecast, you need to set benchmarks with nonfinancial and financial KPIs that mark whether the changes you make are helping your company and teams reach your goals. Be sure to analyze these metrics on a regular basis so your teams are able to determine if a pivot is necessary.  

Create a VDR (Virtual Data Room) 

Before you go to sell your business, create a VDR (virtual data room) to store the financial data your broker or investment banker has on their checklists. Generally, this includes a 3- or 5-year profit and loss statement among other financial records. 

A VDR is essential because it stores not only financial statements but also notes essential details that may be relevant to your investment banker, broker, and buyer. For example, looking back five years in your profit and loss statements, could you explain to a buyer why income spiked or expenses increased? Likely not. However, if you have notes on these occurrences in your VDR, you’d be able to answer their questions, calm any fears, and move along the due diligence process where every delay is costly. 

Clean Up Your Financials  

Clean financials ensure confidence in a buyer. They don’t need to worry about inaccuracies that could inflate the perceived worth of your business or be unsure of the true profitability. Resolve these “checklist” items to get your financials in order: 

• Stop running any personal expenses through your business.  

• Make sure you understand all items on your balance sheet and ensure all records are kosher.  

• Begin using an accrual accounting method if you aren’t already. 

• Get GAAP (generally accepted accounting principles) compliant. 

• Ensure you understand your chart of accounts. 

• Develop a multi-year forecast to show projected growth. 

Get Your Story Straight 

While the above steps help tell a great “financial story,” it’s also important to create marketing materials that explain why your business stands out over others in the industry. There are a few details you should include in your “story” that motivates buyers: 

• Positioning: What are the attributes that make your business unique (also known as a unique value proposition)? Do you have a deep clientele niche? Are there proprietary processes or products that no one else on the market has? 

• Client Concentration: For service-based businesses, demonstrate that revenue comes from a variety of clients rather than a high percentage of revenue coming from one or two clients. If you do have a high client concentration now, it’s advantageous to solve this problem before a sale, ideally by bringing on additional clients.  

• Knowledge and Seniority of Your Leadership Team: If your leadership team is built on experienced, knowledgeable industry professionals, a buyer may be tempted by the maturity of your business.  

• Financial trends: Showcasing positive financial trends with regular growth tempts most ideal buyers. If your profit margins or AGI are going up consistently, be sure to highlight these KPIs to your buyer.  

Get A Valuation ASAP 

You might think the best time to get a valuation is once all optimizations have been made to your business, and you’ve “finished” the preparation process. However, if you wait on professional valuation, you miss out on important benchmarking. Business owners should seek a business valuation as soon as they begin considering a sale. You need a starting benchmark to know how far away your business is from reaching the right sale price. Progress towards your goal can be tracked using a revenue forecasting process. 

Choose the Right Professionals to Guide You Through the Sale 

It’s essential that you have a strong relationship with a business broker or an investment banker early on. You then get to know the selling process and what you may do to make the process smooth.  

Note that if your business is around $2 million or less in EBITDA, you’ll likely be working with a business brokerage. Smaller brokers work with sub $1 million businesses, while a higher end broker works with businesses with $1 million+ in EBITDA.  

Investment bankers, on the other hand, work with businesses with $2 million+ in EBITDA. Bankers generally scope out a wide array of business buyers from private equity to family offices.  

If your plan is to go to market rather than sell in-house to a successor, seek a relationship with an investment banker if possible. Investment bankers, more often than not, get you the highest price possible. However, if your business is too small for a banker, a well-versed broker is also advantageous.  

Regardless of the professional you choose, make sure you vet them. Bankers and brokers put together a pitch deck with their expertise displayed to help make the choice easier.  

Be Ready for Due Diligence 

The list of information and documents your business broker, investment banker, or even the prospective buyer’s bank may need is lengthy. Having organized data and being ready to fill in any gaps in your “story” decreases the time due diligence takes. The diligence process takes 6-9 months on average and anything you do to cut this time down gets you closer to the finish line.  

Preparing for the sale of your business comes down to removing risk and liabilities from your business to look like an advantageous purchase. If you feel that you need help valuing your business and preparing for a sale, reach out to one of our business advisors below. 

Wondering what it’s like to work with a Virtual CFO as you prepare your business for sale? Hear it straight from Teal Media founder, Jessica Teal.