Buy low, Sell High.
We all have heard this is the rule but so many small business owners sell when sales are down for a lower price, not when they have had three to four years of great growth and profit.
Many owners always think that next year will be better and the company will be more valuable then. This is not always the case and a one year break in revenue growth could reduce your value of your company by 25%.
To get the highest price, sell while you are ahead and things are going incredible; not when revenue has sagged or you are bored with what you are doing.
This is what you need to get ready to sell in the next year:
- Strong and accurate financial statements are powerful. Prospects want growing and profitable companies. 10-20% works now since buyers want sustainability over explosive growth. Be able to show why the company is growing and how it is scalable in the future for them. Make sure tax returns and general ledger accounts match the financial statements.
- Know your competitive advantage narrative now. Why should a prospect buy your company instead of building their own version of it. This “buy vs build” decision in real in every sale.
- Know what synergies your company has with perspective buyers so they will pay a higher multiple. Strategic buyers always pay more since 1+1 = 3 for them.
- Choose your service providers well. Have an effective Mergers and Acquisition advisor to help find the best strategic buyer and to negotiate the business deal. Identify an experienced attorney that can protect your rights and an accountant to understand how the deal structure affects your taxes.
- Know your capitalization table and what your investors expect as a financial outcome. Know who will be “in the money (get a return) at a certain price”. There is always one investor that holds up a deal so try to predict who might be a problem at closing.
- Look at all your customer, lease and vendor contracts to see if they require approval to be assigned. Again, there is always one that holds up any deal and seeks leverage for the future.
- Identify anything you don’t want the buyer to find out. They will, so come up with an explanation now.
- Prepare for the buyer to call your business “ugly”. They are just doing their job trying to get a lower price and it should not be taken personally.
- Be careful of unsolicited offers from third parties. They are typically trying to sell you something and not serving your best interest.
- Evaluate any offer realistically in economic terms. Any compensation not received at closing may never be received (like escrows, earnouts and seller loans).
Bonus:
Know why you are selling and what you will do the day after you sell the business. Will you stay on for transition and how what you will do next. Many small business owners call off deals because they don’t know what they will do after the sale.