Getting Your Business Ready to Sell

It has been said that more than eighty percent of businesses FAIL to make it the next generation.  Others are sold under duress because of health issues, divorce, disputes, business slow down and death. A business sold under these conditions does not typically result in the highest value.

How do you avoid these results?  The answer is preparation. The quality of the preparation determines the quality of the results. What preparation involves is a combination of dynamic and subtle factors, many of which are obvious but often are overlooked.

Perhaps the most difficult decision, as a business owner, has to make is the decision to sell. Unfortunately, many owners agonize over the many variables involved in selling without ever making the decision to sell. Others will wait too long to sell and a large group feel they cannot afford to sell their only source of income.

Poor health, divorce, slumping sales, creditor demands, poor employee relations, lack of operating or expansion capital are often the symptoms of an owner who could have sold, but failed to heed "early warning signals." Indecision or lack of proper planning and preparation can prove to be very costly to the business owner, but also to the family, employees, vendors and customers.

When an owner understands where the business is today they can better envision what it could be tomorrow. Finding the right buyer starts with a review of where the business is and what the business is. Ideally, a successor will have talents and skills that compliment the current owners'. Also it is imperative that a successor appreciate, and be able to maintain, the strengths of the business previously created. As such, the owner must recognize the strengths and build upon the opportunity. Additionally, both buy and sell sides may be motivated by personal, rather than purely financial, factors.

Buyers really want a business they can make their own. That is why, as one of the first steps in preparation for sale, the owner must attempt to identify the ideal successor. Buyers want the opportunity to make the business better and, in the process, make it their business that allows them to make money.

Financial data alone will not allow buyers to recognize the full opportunity a business represents. Actually, financial statements and tax returns, for most small and private businesses, are more like mystery novels. They certainly are not operating manuals. Tax returns seldom highlight the opportunities a business represents.

Financial statements alone may not sell a business, no matter how profitable they indicate a business is or has been. The opportunity the business represents will. Do not assume the "numbers" will accurately reflect the opportunity the business represents. Remember, money may be a secondary motivation, capitalizing upon opportunities is a buyer's primary motivation.

Finding buyers is relatively easy. In fact, everyone "has a buyer". Buyers hire firms to search for companies, network actively with lawyers, accountants, bankers and others searching for the right business. The typical aggressive buyer will look at scores of companies, make several offers and still be looking for a company.  What really happens is that the businesses have not been adequately prepared for sale, and are being exposed to the wrong buyers, or are positioned as less than attractive opportunities.

Finding the right buyer for a business can be time consuming and frustrating. When a business demands full time and attention, and its sale is important, professional assistance may be a wise consideration. Obtaining assistance may be a necessity if maintaining confidentiality is important.

Public perception of how, and to whom, one should sell a company comes from several sources: newspapers, movies, television and hearsay. Unfortunately, these sources provide information that is misleading, inappropriate and wrong, particularly when applied to small or mid-size companies.

These sources report about, or depict, public company events that tend to be much too grand a scale for smaller private companies. There is a significant world of difference between the two. No one person owns a public company, many shareholders do. Public company accounting focuses on maximizing profits to satisfy shareholders demands, and allow management to retain their jobs. Private company accounting focuses on minimizing profits to reduce the owner's tax bill to maximize the owner's wealth whereas the focus is on maximizing shareholder value in the public domain..

Private company owners are not concerned with hostile takeovers, junk bonds, P/E ratios, or loss of a job because the company did not show appropriate profits in recent quarters. Most observers agree that major differences in management convention and culture exist between private and public companies. Because virtually no public information is available regarding the sale process and selling prices of private companies, many business owners, and their advisors, attempt to apply public company methodology and Price/Earnings ratios to the sale process of private companies.

Financial results are surprisingly not the most important factor to drive a company's value. Therefore, knowing your customer is the driving force! The person, or firm, recognizing the highest value, will pay the highest price. To identify the best buyer or customer for a business, the owner must first understand both objective and subjective elements within the company. How does the company appear from the outside in? To whom will the problems appear as valuable and exciting opportunities?

The value of a company lies in the buyer's view of its future. Financial results reflect only the past.

• Most likely successor identification should be the first item on a list of important factors that drive a company's value. Unfortunately, this factor usually does not receive the attention required. This is understandable since few of us are able to objectively view ourselves, our business or anything else we are very close and emotionally involved with objectively. Also, business owners and most advisors, although immersed in the business climate, are not familiar with driving marketplace forces or the various types and categories of buyers operating therein.
• Potential or opportunity is an obvious factor that must be on everyone's list. But what is opportunity? Opportunity is different from potential. Buyers will pay for opportunity but not for potential. Why? Opportunity is perceived as having been created by the business owner and potential is that which will be created by the acquirer. Buyers will not pay you for what they will do (potential). They will pay for what you have done (opportunity). Perception of opportunity will vary depending on the type of buyer viewing it, emphasizing the critical need to know your customer.
• Profits factor high on most observers list of important factors. Since most private companies financial statements are driven by the owners desire to minimize taxes, reported earnings are usually misleading. The numbers alone, even after recasting or normalizing, will not adequately reflect a firm's true value. The value of a company lies in a buyer's view of its future

Face the reality that both the owner and the business are constantly changing. Eventually the needs and requirements of a business will conflict with the owner's life-style needs, perspectives and abilities.

Obtaining the best results begins with a timely decision to commence the planning and preparation process. Before an owner acts, they should have a plan. To formulate the very best plan the owner needs to know what the business requires of its succession management. The owner should know what the company is worth and that the timing is right. They must identify the attributes of a likely successor, the one who will recognize the full opportunity that has been created, pay the optimum value and move the company up to the next level of profitability.

Ultimately, one of two options exists for every business owner. Either the succession of the business will be a planned event, and controlled by the owner or, it will be an unplanned occurrence brought on by outside factors. For the good of the business, the employees, customers, vendors and family, it is better decided when the owner still has a choice.

As always I welcome your comments, questions and input and please feel free to pass this Blog to any of your friend in your social network.

Thanks again and here is to staying on the far side of success!

Cheers,

Mel
www.BusinessSuccessSensei.com
www.MelAbraham.com