Timing a Sell – First Things First

If you have a successful business, sooner or later you'll consider selling it off along with all its worries and responsibilities. Remember, though, the degree of care and effort you put into the sales process could have a substantial impact on the price you receive and how long it will take to complete the sale and leave you free to pursue your pleasures. Most business owners are surprised to learn the exit planning process is often started as much as 3-5 years in advance of the desired sale date.

In a perfect world, you'd sell when the national economy is heading towards a peak in the business cycle, when your industry is "hot" among investors, and when your particular business is having a banner year with next year looking even better. However, regardless of the state of the economy or your industry, there are a number of things you can do to shape up your business to make it more attractive to purchasers.

Spruce Up Your Business
Much as a homeowner would give the house a new coat of paint, repair anything broken, and even put some big flowerpots on the front porch before putting the house on the market, you should spruce up your business as much as possible. This is likely to take a year or more, unless you want to make it completely obvious to purchasers that you were "window dressing" in anticipation of selling out.

  1. Buyers Want Cash Flow. The first thing to keep in mind is that the vast majority of buyers want to buy cash flow. Sit down with your financial team and advisors and begin to get your financial statements in order, with earnings and cash flow the priority.  A quality of earnings study is often necessary to determine the true earnings and cash flows a buyer can expect in accordance with GAAP, the standard most buyers will rely upon.  Cash flow is not the same thing as profit. Most buyers consider total cash flow to the owners, after taking into account extraordinary revenue or expense events, excess compensation to owners and family members, and large one-time expenses such as a new software system. They will consider non-cash items like depreciation and amortization, as well as reasonable budgets for future R&D, capital purchases, and repair and replacement reserves. Interest expenses will be reviewed, as will owner perquisites.  They will also carefully study end of period revenue and expense recognition, along with how actual cash outlays and deposits reconcile with company books and records.
  2. Eliminate the Surprises. Review every facet of the business and remedy any problems that could appear during the sale process. No one likes surprises — most of all potential buyers. Whether legal, accounting, environmental, or anything else – solve it now.
  3. Appearances Do Count. The time to replace that old worn-out piece of equipment is before you decide to sell. Don’t assume that a new owner will want to do it or that the price will be slightly lower because you haven’t replaced it. Conversely, obsolete equipment and inventory can be sold off.  The time to “spiff up” the business is now, even if you aren’t selling. Update the website, fix the signage, replace the carpet, paint the place – make it look good. Even if you’re not selling, it’s just plain good for business, and you never know when the time to sell occurs. Keep-in-mind that anything that increases sales also increases profits and the all-important cash flow!

Target Your Buyers

Like developing product features that target your ideal customer, business owners can make changes and refinements to their businesses that position them for the ideal buyers.  Understanding and adapting to the characteristics most valued by active buyers can greatly improve buyer demand and perceived value.  Much of the Forbes Exit Optimization process is dedicated to identifying and engaging active market acquirers for our clients, well in advance of a sale, to identify and prioritize the key factors that will drive maximum interest and price.

All these factors make it clear that you should start planning in advance. While a deal can sometimes be put together in six months or even less, your best chance of receiving the highest and best sale terms for your business is to allow plenty of time for the sale.  Experienced M&A advisors, like those at Forbes M&A, can assist you in the early planning process.