How to Prepare Your Business for Sale
When you start thinking about selling your company, it is usually too late to make changes that increase the value of your business. Instead, have your business ready for sale at all times.
Like staging your home before listing it, you remove any clutter, repair any damages, and make your yard beautiful. The same logic applies to your company when you decide to sell it. The only difference is that many preparations start years before you begin the sales process.
When selling a company, it is very typical that the potential purchaser performs some form of due diligence, reviewing your accounting records for the last three years. But it usually does not end there.
Presenting Your Company in the Best Possible Light
Here are nine tips to prepare your business for sale and present it in the best possible light:
Tip 1: Keep Your Business and Personal Expenses Separate
It is crucial that you run all of your company's transactions through your business accounts and do not commingle them with your personal expenses. Your business accounts must be in the name of your company. If you purchase something for your company, you must use your company credit or debit card. If you need to pay yourself, make a distribution if your business is registered as a Limited Liability Company (LLC) or pay yourself a salary. If you are a sole proprietor, you can also transfer money to your personal checking account to cover your monthly costs, but don't charge personal expenses to your company.
Keeping your business transactions separate from your personal expenses has many advantages. Here are a few worth mentioning:
Ensuring that your business is self-funding would become your focus.
Reconciling your finances would become easier.
Outsourcing your bookkeeping to a third party would become an option.
Protecting your personal assets from litigation against your LLC would improve.
Tip 2: Maintain Accurate Accounting Records
Before agreeing to acquire your company or some of its assets, a potential buyer will examine your financial records (due diligence) not only to confirm that what you are saying is true but also to understand some more fundamental questions:
How efficiently do you run your company?
How much money does the business need to operate?
How much does the business fluctuate seasonally?
How much is the monthly payroll?
If you are having trouble answering any of these questions precisely or do not have evidence to back your answers with financial numbers that match your bank account(s), loan documents, and credit card statements, you should consult a professional to help you maintain accurate accounting records.
Missing or inaccurate accounting records could make your business riskier in the eyes of a potential buyer and result in a lower price.
Tip 3: Create a Monthly Profit and Loss Statement and Balance Sheet
If you keep your books up to date monthly and use professional accounting software (see next point), you will receive a profit and loss statement and balance sheet almost as a by-product without much additional effort. I recommend you review them once a month and learn to appreciate the unbiased, unfiltered feedback these financial reports can give you to improve your operations.
Tip 4: Use Professional Accounting Software
If your company has been around for a long time, a potential buyer typically expects that you use professional accounting software to record your company's financial transactions.
Unfortunately, what your accountant prepares for your annual tax return does not count.
Professional accounting software is usually a cloud-based application like QuickBooks that records and stores all business transactions, including customer receipts, expenses, payroll, and inventory and fixed asset purchases.
If you do not use professional accounting software but want to sell your company, I recommend you familiarize yourself with these applications, select one, and migrate to the new system.
Tip 5: Pay Yourself a Salary
Although you own your company or are a managing partner in an LLC, you still need to pay yourself. Some potential buyers, especially when investors are involved, prefer that you pay yourself a market-rate salary. The remaining profit could then be distributed to the partners (active investors) or economic interest holders (passive investors).
Tip 6: Make a Profit and Grow Profitably
Making a profit is probably the best indication that your business is healthy. However, growing your company profitably over many years proves that your business model is sustainable. A proven and sustainable business model could make your company more valuable to potential buyers, likely increasing the price they are willing to pay.
Tip 7: Simplify Your Business
Just as you declutter your home before selling it, you must also declutter your business. Knowing that running a business efficiently and orderly in fast-moving markets can be challenging, many serious buyers assign a higher multiple to a well-managed company, like homebuyers are willing to pay a premium for a well-kept home.
Tip 8: Follow Industry Best Business Practices
Unless you exceed your industry's standards and best practices by delivering a superior product or service at a higher profit, it may be better to adhere to them. A business falling short of these industry standards and best practices could be valued at a significantly lower price compared to those following them.
Tip 9: Maintain an Authentic Visual Brand Identity
Your company's brand or reputation in the marketplace is usually the crucial element differentiating your business from that of your competitors.
While it may be tempting to spend money on a brand refresh just before selling your company, rushing to change parts of your visual brand identity, such as logo, website, or business card, could be more confusing than helping increase your company's value. Even riskier would be to adopt elements of somebody else's brand.
Instead, resist the temptation of expensive last-minute changes to your visual brand identity. It is more important that your customers, suppliers, employees, and the wider public continue to perceive your brand as honest and authentic.
Have Your Business Ready for Sale at All Times
When is the ideal time to start preparing your business for sale?
Unfortunately, there is no set ideal time. When you start thinking about selling your company, it is usually too late to make changes that increase the value of your business. It takes several years before any meaningful adjustments show up in your finances.
Instead, I recommend having your business ready for sale at all times, even if you are currently not thinking about selling it now. Make the necessary changes, efficiency improvements, course corrections, and investments when they come up. Don't push them off to a later date or bury them in your long to-do list. In my experience, they will never get done that way.
However, if you take care of your business at all times, you will always be prepared to take advantage of an opportunity whenever it comes along.
After all, there may be an ideal time to start preparing your business for sale. It would be now.
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