7 Ways to Prepare for the Transition of Your Business
By: Justin Farmer
Congratulations, you’ve made the decision to sell your business. You’re ready for the transition. But you have more questions than answers regarding how to begin? Like many small business owners, you’re probably feeling overwhelmed by the sheer volume of the task before you. Do you hire a consultant? Organize your books? Notify your employees and clients? What comes first? The questions can seem endless. But while getting started can be the hardest part of the process, it certainly doesn’t have to be.
- Create a Timeline: First and foremost, you need to generate a realistic timeline that works for you. Do you need an immediate exit strategy or are you willing to be a bit more patient and play the market? If your business is already stable and profitable, between one and three years of preparation time is very reasonable. Once you’ve set your ideal sell date, work backwards from there. You know your business. You know what needs to be done. Keep in mind that, even after you’ve found a buyer, the vast majority of business sales take between six and twelve months to complete.
- Pick Your Strategy: In other words, who are you selling to and how are you going to find them? If you have your own personal network, fantastic. If not, you need to consider your marketing strategy. Examine your professional network for potential referrals. Many people in your situation cut the hassle entirely and hire a broker. Brokers not only have expertise and connections that you don’t, they also have access to exclusive listing services.
- Clean Up Your Books: It may be self-evident, but this is the time to shore up your books. Clean up loose ends, check discrepancies, and generally make sure your books reflect the reality of your business. Consider compiling a document packet that you can present to prospective buyers. In it should be copies of relevant financial statements and tax returns going back at least three years (if possible); property-related paperwork; a day-to-day operations manual; and a list of frequently used vendors, suppliers, and other important services.
- Value Your Business: There are several ways to determine what your business is worth. The trouble is choosing which one to implement. Do you use balance sheet based valuation? Income based? If income based, what multiplier do you use. Unless you are absolutely stellar at finance, hire a professional to check over your books and calculate the value of your business.
- Don’t Get Sentimental: Get comfortable with that number you just calculated. Take a deep breath and reassess. Make the decision now so that you can accept what the market is willing to pay later. Essentially, you are establishing your “settlement” authority. Coming to grips with this early on will expedite negotiations later.
- Structure the Deal: As sexy as a clean cut, cash pay-out seems, expecting one may not be practical if you’re trying to hook young entrepreneurs. Most buyers simply won’t have the cash. Sellers willing to provide at least some financing themselves typically sell their businesses for 15% more. There is a greater level of risk involved, but it’s balanced against increased revenue and potential tax benefits.
- Look to the Horizon: Don’t get broadsided by free time. Thinking about your days post-sale now isn’t wishful thinking, it’s pragmatic planning. As Professor David Ekerdt, director of the University of Kansas Gerontology Center said, “Most people define themselves by their job. When they retire, they need a narrative about who they are now. Finding that answer is important for the next phase of your life.” Even if you aren’t retiring, planning that next phase now (or at least thinking about it) increases your chances of actively and healthfully enjoying it.