Many founder-owners have been with their business for their whole careers and have never been in a buyer’s position. When it comes time to retire and sell, it can be jarring to suddenly look at the business you care deeply about through the eyes of a buyer, who may have different priorities and who may ask questions you aren’t prepared for.
In this post I’ll talk about a few key things that, in general, buyers are looking for. This can help you make decisions now that make your business more attractive (and more valuable) to buyers.
Do this thought experiment: after reading this, step back and try to look at your business from a buyer’s perspective. If you see things that need adjusting, it’s worth the investment to bring on qualified professionals (accountants, attorneys, sell-side advisors / brokers) far in advance of your exit. If you’re eight, five, or even 2-3 years out from selling / retiring, there are plenty of things you can do now to make the path to your exit much smoother.
Clean, Consistent, & Accessible Financial Records
Businesses with clean, organized, and complete books (general ledger, contracts, tax returns, etc.) can command higher valuations. Here are a few things to start or stop doing:
Don’t accept unreported / untracked cash payments. If you have a tree removal business, for example, it’s tempting to regularly pick up a few extra hundred dollars by quickly adding on a job or two, but if that income isn’t clearly tracked and reported to the IRS, it can’t really be counted as part of your business’ value. In other words, your business’ true value is only what can be demonstrably proven with clear financial and tax records.
At least once per year, work with a credible outside accountant to organize and audit your books. In addition to finding tax advantages you may not know about, this will create an attractive paper trail that can easily be given to a potential buyer as part of their due diligence.
Don’t overestimate “add-backs.” An add-back expense is an expense that occurred in the past, but was one-time / non-reoccurring, and therefore that money can be “added back” to the valuation of the business. As a good rule of thumb, if an expense is more than one-time or can be expected to be incurred by the buyer post-close, it’s not an add-back.
Important Documents are Organized and Accessible (Ideally in the Cloud)
It’s never been easier, or cheaper, to keep important documents organized and updated in the cloud (using a service like OneDrive, Google Drive, Dropbox, etc.). This is more secure and more easily accessible than storing printed documents in file folders.
However, many businesses—especially founder-led businesses that have been in business for 25+ years—still rely on moving physical paper around. This can make due diligence very difficult, as you may spend lots of time searching for important documents such as leases, contracts, governance documents, financial records, and other things. If you do have physical documents, the least you can do is make sure they are safe, dry, and efficiently organized—because in the sales process, others will comb through them, sometimes multiple times.
While it will be an investment, it can pay dividends upon exit to work with a consultant who can help you organize and digitize your files and then train your administrative staff to use them. If you’re disorganized and can’t find key documents, it may lower the value of your business, its desirability in others’ eyes, or—worse—kill a deal because of an inability to locate important information.
Updated and Documented Organizational Chart
Business buyers want to understand everything about your business: your market, your operating structure, your competitors, your existing liabilities & contracts, and your advantages and disadvantages. Near the top of that list is understanding who works for you, how much they’re paid, and what they do.
Having a clearly documented organizational chart with employee names, roles, hire dates, and reporting relationships can make things a lot smoother for the buyer as they decide whether they want to make you an offer. Knowing who’s responsible for what helps buyers understand which functions depend on which employees and therefore which employees are most critical for continued smooth operations.
Role clarity is absolutely essential for high performing teams. People gain energy from knowing what they’re responsible for and how success is measured. If there’s low clarity about that right now, it’s possible your employees are less productive and motivated than they could be. A savvy buyer will pick up on this as they eventually meet team members—which is always an important part of the process.
Send us a message if Upstate Succession can help you with an org chart and role clarity like this.
A Clear Readiness to Sell, and Patience with the Process
It can be hard to decide if you’re ready to sell your business. There are fewer things more discouraging (and time-wasting) than working through a months-long process with a potential buyer only for the seller to get cold feet and decide they’re not ready.
How can you know if you’re really ready to sell? Here are a few ideas:
You are willing to commit to the time and expense of letting someone else examine and ask many detailed, sometimes pointed, questions about everything in your business
You have a clear vision for what’s next - how you want to spend your months and years post-sale - and are ready to let go of control and the status that comes with being an owner (of that business, at least!)
You’re open to considering financing part of the sale - because that will open more buyers up to you and demonstrate that you are confident the business can continue to succeed
You’ve investigated what other businesses like yours have sold for in the past 6-12 months and have a realistic idea of how businesses are valued and what you can hope to receive
You’ve reached out to some brokers to build relationship and start getting professional guidance in preparing for a sale
You are ready to spend time building trust with a seller and explaining things that you’ve never really had to explain to anyone before
Sometimes, goals change. And sometimes you may realize that you no longer want to work with a certain buyer, for various reasons. That happens! But it’s best not to go down the sales path until you’re as sure as you can be that you really intend to sell and move on to a new phase of life, whether that’s retirement or a new venture (or both!).
Low Customer Concentration / High Recurring Revenue
Sometimes, your business has done well because of a handful of lucrative contracts. In some industries this makes your business riskier for your buyer, because a few customers changing their minds may mean a big drop in revenue. This is especially a risk if those customers have a special relationship with you as the owner rather than with your company / brand.
If at all possible, try to diversify your customer base before selling your business. Invest in some marketing and/or lead generation to find additional revenue so that a buyer doesn’t feel like revenue is inherently at risk if buyers make different choices (whether because of the change in ownership or for other reasons).
Recurring revenue is also very attractive to buyers and helps a business attain a higher valuation. Loyalty programs, long-term contracts (with monthly or quarterly billing—not paid up front!), and service contracts are just some ways to demonstrate sustainable finances.
Critical Functions Delegated and Minimal Owner Involvement
Buyers and industry insiders joke all the time: if a listing says “minimal owner involvement” or “owner only spends 3-4 hours a week on business,” that’s usually just a sales tactic and not reality! Some buyers want to spend all of their days doing something because they like it or are passionate about it. But most business buyers aren’t looking to buy a job. They want to become an owner. Understanding this difference is important and can help you start planning now for your business to be more attractive.
In the classic book E-Myth Revisited: Why Most Small Businesses Don’t Work and What To Do About It, Michael Gerber makes the point that being an owner is not the same thing as having a job. The key difference is whether the owner enjoys the benefits of ownership. The core benefits of ownership are (1) flexibility with your time and (2) autonomy in decision making. Many owners have actually created jobs for themselves because their personal touch, guidance, or permission is necessary in too many places.
What makes ownership different than a job?
If your business takes place in a physical office or at a job site, ownership means that, most of the time, you’re not required to be there. You can choose to be somewhere else.
Ownership means that you’ve delegated critical tasks to others, who have decision making authority and do not normally need either your guidance or permission to run key business functions.
Ownership means you don’t feel “forced” to be present, to oversee most or any critical activities, and are able to step away—for weeks or even months at a time!—with minimal worry that the business will fall apart.
For many small businesses, this sounds more like a fantasy than a reality. But the more you can delegate and empower others, the more freedom you’ll find—and the more attractive your business will look to a buyer. Here are some steps you can take to move in this direction:
Invest in key hires, with a strategic plan to use those roles to generate much more revenue than they cost. An example is hiring a head of sales to train and hold your sales team accountable rather than you needing to fill that role.
Automate whatever you can. Cloud-based document sharing or cloud-based outsourced accounting services, as an example, can reduce cost and employee hours. You can automate things like appointment reminders, marketing emails, and sales follow-up.
Train others early and often that independent thinking and decision making will be rewarded. If your people are afraid to fail, they won’t step out and take ownership of their roles. Create internal mentorship / apprenticeship moments in which you intentionally show, teach, and delegate things to others. You’ll be surprised at how people step up if you give them the room to try, fail, and learn. Incentivize taking initiative and make it very clear how people can grow in their career.
Create standard operating procedures (SOPs) for everything. This is the secret to the franchise model: everything needed for success is already laid out according to a tested plan. When the plan is followed—assuming nothing unusual happens—profit is the result. Imagine your business as a franchise and create SOPs for absolutely everything. This can include training manuals with pictures, written documentation, and step-by-step videos. Regularly incentivize people to learn and test this knowledge. This makes it much faster to onboard and delegate anything.
Minimal Family Complications
Sometimes, family-owned businesses have one or more family members working in the business who don’t desire or are unable to take on the role of owner. (You may have heard that a vast majority of family-owned businesses don’t survive being passed to the second or third generation. This is actually a myth. Family-owned businesses can be a great source of wealth and pride for many generations with prudent planning.)
However, for many reasons, it’s often the case that a family business gets sold rather than passed down. If you’ve got family members working in the business, this can sometimes create awkwardness or tension with a new owner. When she makes changes, family member employees might take it personally, and potentially spread that frustration to other team members who know and trust the family name.
It’s very important to be clear with family members on your plans for selling your business. They need to understand a few important truths:
If there is any chance their continued employment has been because of the family connection rather than because of stellar performance, their job will probably be in jeopardy under a new owner. These conversations can be awkward, but it’s not actually kind to avoid telling someone the truth. Start enforcing fair performance standards now, and give people a chance to rise up to a better version of themselves.
The new owner is not obligated to take their advice or give them any more authority than they already have. Even if their advice is good, they should be prepared to be treated like any other team member. Even good change can be hard to experience.
If you believe a family member will not want to stay post-acquisition, it’s your ethical responsibility to share this with your broker and/or buyer. The buyer will need to consider the cost of replacing and/or restructuring that role. Have candid conversations with family member employees about their plans and then be honest with buyers—this will generate trust / goodwill and make it less likely that a surprise later on will kill the deal.
Don’t let a family member wonder whether they will inherit or have the chance to buy the business if you’ve already privately decided that won’t happen. Again, the sooner you have these uncomfortable and clear conversations, the less noise you and a potential buyer will have to deal with. There’s a saying in the acquisitions world: “Time kills deals.” Here’s another one you should remember: “Noise kills deals.” The more complications pop up, the harder you make it for a buyer to feel confident about your business—and family complications can be the worst.
In conclusion
Being able to sell your business is an exciting reward for your hard work and perseverance. Making some of these strategic decisions will make it more likely for your business to sell quickly and with minimal complications. It may be difficult or require investment in the short term, but in the long term, you’ll get to enjoy stepping confidently into your next phase of life post-exit.
