It was time. After 30 years running their small 25-employee company, Frank and Martha were ready to retire to the Oregon Coast. To their surprise, after a 12-month listing with a business broker, there were just a few interested parties and no offers. Instead of enjoying retirement, Frank and Martha are now a year older and no closer to retirement. For them, preparing to sell was an after-thought.
Regretfully, this scenario plays out often. Many small companies aren’t in shape to sell. This post offers tips for building a more marketable company.
5 Ways to Make Your Business More Sellable
- Clean up financial reporting. Nothing scares buyers away like poor financial statements and back up data. If you don’t have the resources to do this work in house, find a CPA or fractional CFO to help with this.
- Build a team. Often, businesses are too dependent on the owner(s). If buyers are unsure about a company’s ability to prosper under new leadership, they won’t buy. Buyers want to see a capable and committed management team. Stay bonuses can help.
- Diversify the customer base. Companies with a few clients that represent a majority of revenue are tough to sell. Contract manufacturers often have this problem. A business may not survive losing its top client, let alone continue to pay down acquisition debt. A good rule of thumb is to keep top clients below 20% of revenue.
- Document, systematize and automate. The more confident buyers are that a business will continue to run smoothly under their watch, the more likely they will buy and the more they will pay. Most companies have opportunities in this area.
- Quality of earnings. Buyers and lenders discount or shy away from businesses with declining or uneven earnings. They also don’t want to see deferred capital spending or excessive working capital needs that put a drag on future cash flows.
These are some of the most common recommendations we give to company owner clients. Every business has its own unique levers to pull.
I realize these recommendations are easier said than done. Just know that failing to prepare for a sale can result in no deal, or selling at a substantial discount and not having enough money to enjoy retirement or prolonging retirement for several years. See my recent post on Why Business Owners Should Prepare to Sell Now.
At Exit Strategies we counsel business owners before taking their businesses to market. After an initial assessment, we sit down with owners to create simple plans to improve sale-readiness and value. When our clients are ready, our senior M&A brokers guide them through the sale process. As a result we have one of the highest success rates in our industry.
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Al Statz is the founder and president of Exit Strategies Group, a leading M&A advisory and business valuation firm with offices in California and Portland Oregon. If you are interested in selling your company in the next few years, call Al at 707-781-8580 or Email him.