Murphys Law in Business Sales / Mergers & Acquisitions
Did you know that in Business Sales Nationally less than 20% of the businesses listed ever sell. Did you also know that 50% of what goes to contract dies before it ever gets to closing. Now with those types of statistics one would think that you would vet and choose your professional business broker or intermediary with a bit more caution and thought but you would be surprised.
All of the deals and all of the failures add up to experience and lessons learned and when interviewing a broker you should insure they have been in the trenches and got deals done. The ability to anticipate, forecast issues and navigate the process is vital to the successful sale of a business. Degrees Matter, Certifications Matter but give me the scarred veteran any day of the week.
For more on this topic and many other items related to selling and buying a business go to our website at http://www.yourfloridabusinessbroker.com
There are 10 steps to preparing your business for sale
1) Keep good books and records. It will be the first thing everyone wants to see when buying or valuing your business. With today’s computer technologies and programs you have zero excuse not to have your business records completely automated and accurate to the minute. 2) Grow earnings before you sell. Up trends are very important. A buyer will value the future earnings based on past results. If the chart is going up, the future earnings must have a growth trend too, and the value will be higher. Would you buy a business that made $50k, then $100K, then $150K in successive years? (YES) Would you buy the reverse business? (NO) Would you buy a business that was flat? (PERHAPS) Would they be equally valued? NO! 3) Separate fringe benefits from real expenses. I know none of you business owners expense unnecessary items in your businesses. But many legitimate expenses could even be declared by a valuation expert as discretionary. (Did your beach store really need to visit the bathing suit manufacturer in Florence, Italy????) Keep a separate credit card, or accounting notation, or a journal. 4) Have proper management and staff in place. Small businesses are valued on one owner operator working the business. If your spouse performs a job that must be replaced, the value will be negatively impacted. Your best bet is to phase the family out and have staff that will stay on after a sale. Also, no buyer wants to work 60 plus hours a week. If you do, you had better get some staff before you try to sell. Chief cook and bottle washer business owners will find it very hard to sell. Transfer the knowledge NOW! 5) Have the capacity to grow and make capital expenses. If your business is cramped and the business is limited by the current facility and equipment, you business valuation will reflect that ceiling of revenues and profits. Either sell before you need to invest, or buy the equipment and move the business, and sell in a few years. 6) Keep good books and records. (Getting the picture yet?) There are several great accountants and CPA firms in your area. PICK ONE AND USE THEM! 7) Increase the bottom line. Your business is primarily valued based on the profit to you! And yes, they do use multiples, and the multiple increases as the profit increases, i.e a business making $100K may be worth 2x’s ($200K), but a
business making $500K may be worth 3x’s ($1.5M)….but remember #2, the trend also affects multiples. 8) Keep everything in good repair…and if you do not use it THROW IT OUT! The value of equipment and businesses will be higher if everything works and looks nice. Also, buyers will want everything in working order at the day of closing…even that old piece of equipment that you do not use anymore. 9) Control, manage, and document inventory. PLEASE do not play with inventory as a tax savings strategy. It will catch up with you someday, and you will not like the consequences! (Call me if you want to know the gory details!) Plus, you need to keep your inventory lean and moving! If it’s old, donate it or mark it down. Your balance sheet will shine! And your business ratios will too. 10) Keep good books and records. You got it now right!! FYI. Any bank looking to finance the acquisition of your business will look at least at three years of earnings to decide how much they can lend. If a buyer cannot get enough money from a bank, you have two choices. Seller financing, or sell for less. Good books and records will allow your business to sell fast, for a high valuation, and be financed with third party financing. ALL GOOD FOR YOU.
business making $500K may be worth 3x’s ($1.5M)….but remember #2, the trend also affects multiples. 8) Keep everything in good repair…and if you do not use it THROW IT OUT! The value of equipment and businesses will be higher if everything works and looks nice. Also, buyers will want everything in working order at the day of closing…even that old piece of equipment that you do not use anymore. 9) Control, manage, and document inventory. PLEASE do not play with inventory as a tax savings strategy. It will catch up with you someday, and you will not like the consequences! (Call me if you want to know the gory details!) Plus, you need to keep your inventory lean and moving! If it’s old, donate it or mark it down. Your balance sheet will shine! And your business ratios will too. 10) Keep good books and records. You got it now right!! FYI. Any bank looking to finance the acquisition of your business will look at least at three years of earnings to decide how much they can lend. If a buyer cannot get enough money from a bank, you have two choices. Seller financing, or sell for less. Good books and records will allow your business to sell fast, for a high valuation, and be financed with third party financing. ALL GOOD FOR YOU.
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