You’ve spent years building your business, pouring yourself and your time into it, and you may not be able to imagine what life would look like without it. But there may come a time in the near or distant future when selling your business is the best option. When this happens, being prepared helps ensure a smooth transition and maximizes the value of the business you’ve worked so hard on.
Even if you don’t plan on selling soon, setting your business up for success now can prepare you for a sale down the road. This will soon become a reality for a large number of small business owners, as a wave of Baby Boomer business owners are reaching retirement age. This trend is known as the “Silver Tsunami” and will result in an estimated $10 trillion in business assets being transferred to new owners through the sale of these businesses.
One way to prepare your business for sale, whether now or down the road, is to consider what lenders look for in a business, because buyers tend to look at the same things. These actionable steps will give you a solid assessment of your business’s overall health and prepare the information that buyers need to make an informed purchasing decision when the time comes to sell.
Ready or not, the time to prepare your business for sale or transfer to new ownership is now.
The 5 things buyers want to see before purchasing a business
If you’ve applied for a loan in the past, you’ll notice that the things lenders and buyers look for are strikingly similar. In part, this is because buyers will likely go to a lender for the funds to purchase the business. It’s also because both parties, the lender and buyer, want to understand financials and revenue streams, see evidence of strong management systems, and understand the growth potential and legal compliance before making their investment.
Let’s take a closer look at the aspects that buyers and lenders want to see:
Clean financial records: No one wants to sift through piles of receipts and decipher confusing spreadsheets. Organizing monthly financial statements and tax returns and keeping business and personal expenses separate are ways to keep the financials clear and easy to understand.
Predictable revenue streams: Showing consistent monthly income along with a diverse and loyal customer base gives both lenders and buyers peace of mind that this is a worthwhile investment.
Strong management systems: Written procedures make it clear to anyone coming in how things are done. You should also identify trained staff who can run daily operations, so the buyer knows whom they can go to with questions.
Market position and growth potential: Identify clear competitive advantages to show buyers or lenders where the opportunities are. You should also be honest and recognize areas with room to grow. Showing that you understand your reputation and identifying ways to build that reputation with customers and clients can give buyers confidence in taking over.
Legal and regulatory compliance: Buyers and lenders both want to know that they’re not walking into a business with legal and compliance issues. Improper classification of employees, workplace safety issues, permitting issues, lease problems, and missing tax deadlines are just some examples. If you have issues with any of these, take steps to remedy them.
Be aware of what kills business acquisition deals (and loans)
Even if things seem to be going smoothly, there are a few things that can spring up and kill the deal or the loan. Getting ahead of these makes the sale and lending process smoother and easier to navigate. If you recognize any of these in your business, the time to take action is now.
Valuation killers: If personal expenses are mixed in with your business financials, you have deferred maintenance on equipment, or you have put off making a succession plan and now key employees are nervous, this can make the buyer or lender hesitate to move forward, knowing they’re signing on to a mess. This can lead to a valuation gap where you believe the business is worth more than what buyers are willing to pay.
Timeline traps: Getting backed up against the wall rarely ends to your advantage. If you fail to plan for your retirement and don’t know how long a sale will take, or are thrown off by trying to time the sale perfectly, you may be forced to take a lower offer or, worse, shut down.
Buyer funding issues: If the buyer can’t secure funding or acceptable terms on their end, the deal may be dead. Setting the business up for the transition and getting everything in order can build lender confidence.
Your 90-Day action plan
Month 1: Financial foundation
- Separate all personal and business expenses
- Gather 3 years of tax returns and financial statements
- Meet with an accountant to identify any other cleanup opportunities
- Calculate your true monthly cash flow to show it can support a buyer’s monthly loan payment. This information will also help you in the event you need a business loan.
Month 2: Operations audit
- Document your top 5 business processes
- Create an organizational chart showing who does what
- Gather and list all key customer contracts and their terms, and start keeping them in one place
- Review all business licenses and insurance policies
- Look at your business through a legal and compliance lens, and make a list of all issues that need to be addressed
Month 3: Value assessment
- Get an informal business valuation (online tools or local SCORE mentor)
- Research recent sales of similar businesses in your area
- Identify your top 3 competitive advantages
- Brainstorm succession plan ideas along with a pros and cons list of different options
- Begin addressing any compliance or legal issues
Preparing for a sale now can save you time in the future
The good news is that preparing today for a future sale doesn’t have to be as overwhelming as it sounds. Understanding the importance of preparing your financials and where deals often fall apart, along with taking steps to get everything in order, can get you ready to sell your business when the time comes.
Even if you’re not ready to sell yet, preparing for the future leads to better decision-making and a clearer path to growth. If this sounds overwhelming, the good news is that you can start small. This month, spend a few hours gathering and organizing your financial records. You may find out that you’re in better shape and more organized than you thought, or you might realize you need to spend more time getting everything together.
Whether you sell in two years or in 20 years, you’ll be glad you started today.