Advanced Planning Is Needed to Position a Business for Optimum Sale Value
Learn the key factors in figuring out what you should do to prepare your business for a sale and where to turn for help.
Preparing for a sale is similar across many industries. Let's look at a more familiar example (real estate) and then talk about how that applies to business.
How Business Is Like Real Estate
Let’s start with a simple example, such as selling residential real estate. When selling their home, many people seem willing to sell it as is and take what they can get without putting in much effort to prepare their homes to be sold. It is amazing what you see when you look at the pictures on the MLS or other real estate sites — just browse the local real estate listings. You have to wonder why the owner, who knew a real estate agent was coming to take pictures for their listing, didn’t at least wash the dishes and put them away.
It's clear that the only thing the owner did the day they decided to sell their house was look up the phone number of a local real estate office. There was no planning or preparation to maximize the return from the sale of their home. Selling 'as is' means they will lose money on the sale. Some people put in less effort to sell their business than their house! Why?
You Get What You Prepare For
Let’s look at the timing involved with the 'as is' sale. The first question home owners generally ask their agent is, “What is my house worth?” Unfortunately, the homeowner doesn’t always understand that the value of their home is a variable that depends on the level of effort they put in to prepare it to be sold.
It’s tempting to ask why the real estate agent accepted the listing or didn’t advise the owner that the house needed more work to achieve the maximum value from the sale. In most cases, the agent probably did advise the homeowner to at least do the dishes and clean up. The reasons for not preparing for a sale may include the fact that the individual just doesn’t have the skills or resources required and the agent would rather have an active listing in marginal condition than risk losing the listing. The same thing happens in business.
The agent establishes a value for the house, in its current condition, and markets it that way. It is the owners job to prepare the house to be sold. The agents job is to sell what the owner is offering even though it may be possible to increase the value of the house and potential return from the sale substantially if the properly had been prepared with increasing its value in mind.
Recognition of this discrepancy has led to the growth of a whole new industry of investors who are willing to acquire run down homes and renovate them (known as 'flipping'). Investors who see the potential value in a house and have the skill and resources to make the renovations can earn a substantial profit for their efforts due to the increased value they create.
If you’re planning to sell your home, it makes sense to prepare the home to the best of your ability before you call a real estate agent. It is not the responsibility of the agent to prepare the house to be sold. If the owner doesn’t have the skills to optimize the value of the home, they might consider hiring a pro. If you don't prepare, prepare for the value to be lower than its potential.
Selling a Business Starts Before you Contact an Agent
Now let’s step up our example to the sale of a business. The sale of a business is far more complex than the sale of residential real estate. Preparing for the sale of a business, known as positioning, is the owner’s responsibility and needs to start well before engaging a business broker or investment banker to act as a sales agent. Whether they are trying to get out from under a failing business, raise the funds to jump start their next venture or have the money to continue their lifestyle in a well-earned retirement, maximizing the return from the sale is generally a driving requirement in the sale of any business. This makes proper positioning a high priority.
Effective positioning can take a year or more to accomplish. Buyers will eventually perform detailed legal, financial and operations due diligence assessments that are key to optimizing the value of the business. Legal positioning (including cleaning up the ownership of the business, resolving litigation issues or getting valid contracts and agreements in place), financial positioning (including preparing financial reports and third party audits of those financials) and operations positioning (including optimizing the operations infrastructure, defining a business model, sales projections and strategic plans) all take time to complete and are just some of the positioning activities owners should complete before contacting an agent.
Increased valuations come from successful assessments. Rather than engaging a sales agent as their first move, many business owners would do better to hire a positioning consultant to help prepare their business, and maybe even to help them hire the right sales agent… when they are ready. If multipliers for your industry are 3.5-4.0 times revenue and your business is doing $5 million in revenue annually, your goal should be to be valued at the high end of the bracket and capture the additional $2.5 million for the sale. Proper positioning is used to create a differentiator.
It is the responsibility of the business owner to prepare the business to be sold, and this needs to be completed prior to contacting a sales agent. Unfortunately, many business owners wait until they contact an agent to start the necessary steps to prepare their business for sale.
The sad fact is, owners who fail to position their business in advance have likely already lost value. In Moving On — Getting the Most from the Sale of Your Small Business, the time for hiring an agent is examined in the context of the entire sales process. “Your positioning activities should be completed before your business becomes an active listing,” so looking at the sales process in this manner seems to go against the natural instinct of most business owners impacting their return in the end.