process documentation

3 Things To Know Before Selling Your Business

Waking up one morning and deciding to sell your business and actually being in a position to sell your business are two very different beasts. Having a business that is eye-catching enough to sell easily is an appealing prospect to any business owner. Whether you plan to sell your business in a few years or a few decades, here are some tips to improve the production and value of your business so you can land the highest quality buyer.

Tracking

The first questions any prospective buyer has are whether the business makes a profit and if it will continue to make a profit. You need to be able to provide empirical evidence that your company is successful. Having everything organized ahead of time will save you headaches, embarrassment, and help keep you on schedule. Tracking several years of key performance indicators (KPIs) will give you the clear numbers you need to prove the reality of your success. KPIs are quantifiable measurements that track the progress you have made towards your company goals. For instance, what is the client acquisition cost? What is the lifetime value of a client? Being able to identify and track your own company’s individual KPIs will provide you with the data that makes potential buyers willing to invest.

Furthermore, it is powerful to know the numbers of your business. The more data you have on your business and how it runs, the easier it is to increase the value of the business over time. Then when you are ready to sell, you will have years of data showing not only that this business you have built runs smoothly and is profitable, but that it has improved over the years. A business that has shown traceable improvement is much more likely to continue to succeed, and a quality buyer will understand and appreciate this concept. Being able to quantify and verify the standing of your company will reduce the risk for the buyer and increase the worth of your business.

Defined Business Operations

Once you have proven that your business is indeed productive and generates excellent revenue, the inevitable next question is how does it work? Though this may be a secret that you are not willing to share until due diligence, it is still important to have systems in place to make your business run effortlessly. The buyer may not need to know what they are so much as that they exist. From the buyer’s point of view, they want to know how to run things efficiently and that there is great process documentation. They are buying a business that is already built to save themselves the hassle and headache of building it themselves. They want a business that is functioning and working already, and they want to make sure that they will have the knowledge and ability to continue it running. Give them the assurance that you have a formula for your business that they can rely on.

Having very defined business operations is an important practice you will want in place whether you sell your business or not. It is vital for any industry to identify the best practices in that business. What works the best in any situation?

A great example of this is the huge food chain of McDonald’s. They have systems in place that are so well laid out they know how to put every pickle on every hamburger. The business has succeeded and grown to the point where everyone world-wide knows what McDonald’s is. Another example is an accountant friend of Melissa’s who has broken down his operations to the point of telling stroke by stroke what to do. He has such an incredibly designed system that anyone could learn how to do accounting. It is the process documentation that makes the difference.

That is the great selling point of clearly defined operations: having what you do and how you do it so well documented that someone else can come in, with little or no training, and duplicate your triumph. You want your systems to be so perfectly laid out that a ten-year-old can pick it up and understand how to manage the business. After all, you want the business that you have poured your heart and soul into to continue to succeed as much as the buyer does.

An exit strategy

A good exit strategy takes planning and time, generally at least 2-3 years. You need time to plan on how to make your company the most valuable it can be. One key element to making a marketable business is maximizing the value of the company. There are many diverse ways to increase the value of any business. If you have already been tracking and improving your company, and setting in place defined operations, you have increased your business value substantially. Your exit strategy should also include some changes in how the business has been running.

One such change many businesses need to make is to stop minimizing taxes and start maximizing value. If you have only been focused on minimizing taxes, when the buyer sees those tax returns it may look as though your company profits are much less than you really value them at. How much the business reports making will be a huge factor in selling your business. It is worth paying more taxes for a few years to sell your business at a much higher value. If your accountant can not change his methods from decreasing taxes to raising value, you may need to consider hiring a new accountant.

Another change that you may need to undertake for a smoother transition is to phase yourself out. A business that can run itself while the boss is on vacation is much more attractive than a business that falls apart the moment you walk out the door. Erin once owned a tutoring company that thrived. Within five years she had grown to 23 employees. By the time she was ready to sell her business she had created systems so well administrated that she was able to train the new owner on one Saturday. Being able to be sufficiently trained and knowledgeable-with all the keys and tools needed to achieve the company goals-in one day is attractive to any buyer. And Erin was exceedingly happy not to have to stay on for four or more months without pay, just to train someone to take her place.

Valuing your business will also depend on how many hours you, as the CEO, are working. The less hours you can work while still maintaining a good profit, the higher the value of your company. This happens because part of the value of a business is determined by what profit is projected on a full working schedule. For example, if Business Owner A works for 10 hours a week and makes $100,000 annually, they are projected to make $400,000 with a working schedule of 40 hours a week. However, Business Owner B works 60 hours a week and makes $500,000 each year. While Owner B makes more money, his business is only valued at $333,000. Not only is poor Owner B valued at less, but he is slaving away each day while Owner A lounges about sipping punch on a tropical beach. Phasing yourself out of certain aspects of the business by training or hiring others will make a smoother transition for everyone, increase your company value, and create less headaches for you.

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