Preparing to Sell: 7 Variables to Consider
September 15, 2016
As a business owner you know critical decisions require careful thought and planning. When it comes to the sale of your restoration business, few decisions are more absolute.
If you are within two to five years of a potential sale or transition, please know it’s more complex than just posting an ad online and hoping for the best. There are plenty of things to consider and steps to take as you intentionally prepare your business for sale. Here are a few planning variables as you prepare for your best exit strategy.
1) Prepare Early
Whether you’re focused on maximizing profitability, getting your paperwork in order, cutting costs, or generally getting your business ‘cleaned up’, starting early allows your efforts to take effect, therefore being more noticeable to a buyer.
Waiting to prepare until you want to sell means you missed your golden opportunity to enhance the business value. It’s simple, the earlier you start the more effect you’ll have; this directly translates to a higher business value.
After 15+ years as a broker, consultant and M&A advisor, history has revealed the most significant barrier to a successful sale- lack of preparation. With no preparation many owners expect to receive top dollar and have the process go smoothly; it’s virtually impossible.
2) Understand Adjusted Earnings
Many business owners keep their net profits low for tax purposes. The good news is that restoration related businesses like yours are not valued based on net profits, but on Adjusted Earnings. Many owners have never heard of this term, but it’s vital to understand what is driving the value of your business.
In simple terms Adjusted Earnings is the total financial benefit to the owner(s) of the business. It is calculated as follows:
+ One Owner’s Salary
+ Owner’s Discretionary Expenses
= Adjusted Earnings
Earnings that have been ‘adjusted’ will account for the owner’s salary, as well as their discretionary expenses (those expenses that are not business related). Examples include: personal vehicle payments for the owner and/or spouse, life insurance, health insurance, retirement and charitable contributions, travel expenses, meals and entertainment, along with any other personal financial benefit expensed through the business. The list can be extensive.
Understanding this number and how it’s derived is critical toward understanding business value, how a buyer (and their lender) will view your business, and ultimately the key differences between the tangible and intangible value (goodwill) in your business.
3) Delegate More
Regularly I hear comments like, “I can’t find good help”, “Nobody wants to work anymore”, or “It’s just easier if I did it myself.” The result? You end up working 60-70 hours a week and worse yet, you may still be working ‘in’ your business, not ‘on’ it.
Delegating is far more than telling people what to do. (This is why earnest attempts fail on a regular basis.) It is the art and practice of transferring tasks and accountability to your staff. Done correctly, with proper communication, checks and balances, the results are idyllic: increased job performance and moral, builds teamwork, alleviates stress, frees up more time for you to be strategic, creates a better company culture, and ultimately helps ensure successful results.
If you are doing too much as an owner, the risk goes up for a buyer, this results in a lower price. For most owners there is a direct correlation between learning this principal of delegation and enhanced business value.
If not learned, these limitations will become the biggest hurdle to achieving greater success. When preparing to sell, remember a buyer wants to buy your business, not you.
4) Look at Cost Efficiencies
There is no need to wait for a potential transaction to clean up the balance sheet, eliminate ‘slush’ accounts on the P&L, or reduce costs where possible. In the past I’ve had owners look at their insurances, utilities, etc., and by making a few simple calls have saved many thousands of dollars a year. One client over $20,000 a year!
Additionally, look at ways to operate more efficiently or eliminate non-vital expenses. With your focus on spending and expense control, I guarantee you’ll find ways to reduce expenses and increase business value.
5) Understand Your Financial Story
After 15+ years of assisting owners it’s proven… most owners are unaware of their own ‘financial story’. Many are familiar with the balance sheet and can explain expenses on a P&L. However, when looking at a 3-5 year history of financials and tax returns, they become lost in the details, unable to explain expense fluctuations, re-categorizations from the P&L to the tax return, or the elimination of expense categories altogether.
A buyer will ask plenty of detailed questions… their CPA, lender and underwriters will ask dozens more. Having answers builds buyer and lender confidence; having no (or poor) answers, destroys it. This confidence directly parallels business value.
6) Reduce Customer Concentration
Client diversification is far more than a management theory. Ideally, a buyer wants a business having a broad customer base, with no customer accounting for more than 15% of gross sales.
This may not be avoidable and a thus a reality for many businesses. Of course this doesn’t mean your business isn’t salable, it only means there is more perceived risk for the buyer. The buyer will also consider the longevity of these relationships, the industry and business dynamics, as well as the business’ ability to find a replacement client should the relationship cease in the future.
7) Separate Emotion & Reality
During a transition the financial stakes will be at an all-time high. Add to that decades of what it has meant to you and your family to be self-employed, it’s easy to see why decisions become emotional. This trap is real and far too common. At any time during your career, this is one of the most vital times to get educated.
Unfortunately, emotional decisions put every other decision at risk as well. As Jim Collins indicates in his book Good to Great, “One thing is certain…you cannot make a series of good decisions without first confronting the brutal facts.”
As you contemplate selling or transitioning your business there is plenty to think about. However, as an owner you’ve always had plenty to think about, so this is not new. Now is clearly not the time to bury your head in the sand and hope for the best.
In reality there are dozens of variables to consider when preparing your business for sale. For this reason, nothing compares to getting educated and learning the steps to properly navigate the road ahead. The knowledge received is a valuable insurance policy for a successful exit strategy.