According to a report published by BizBuySell.com, an online market place for small business sellers and brokers, the number of small businesses which sold in 2017 increased by 27% over 2016. Based on survey data, this growth in business transactions was driven by: (1) strengthening revenue and profits of small businesses; (2) an increasing number of owners looking to sell; and (3) an increase in the number of qualified buyers in the market. The survey data suggests that the number of businesses sold will continue to grow into 2018.
Prepare to Take Advantage of These Trends
If a business owner is interested in exploring the sale of their business in the context of this increased transaction volume, the small business owner should take steps to prepare their business for sale. These steps are intended to make the business more attractive to a broader group of potential buyers and increase the amount that the potential buyers are willing to pay.
Actions to make a business more attractive to buyers include:
1. Focus on improving profitability and cash flow:
Buyers may value a business based on future cash flows that the business will generate. Cash flow can be improved and stabilized by diversifying revenue sources, incentivizing customers to commit to future revenue streams and aggressively reducing unnecessary expenses. Buyers value strong and consistent cash flow performance. The strength and predictability of future cash flows is appealing to buyers and will increase the selling price of a business.
2. Buyers are generally interested in retaining the employees:
As unemployment rates continue to decline, the competition for strong talent will continue to increase. A business’s employees have relationships with customers, relationships with suppliers and the intrinsic knowledge of running the business. If a potential buyer is confident that key employees will stay on after a sale, the value of the business is increased. Options to increase long term retention include long term incentive plans, non-compete agreements and fostering a positive work environment for employees.
3. Keep organizational and financial records in order:
The sale and purchase of any business will be dependent on the successful outcome of the buyer’s due diligence. Due diligence is the opportunity for the buyer to “peel back the onion” and analyze the details behind the business. If the buyer is not able to assess the quality of the business because the seller has not kept accurate financial books, maintained comprehensive contract documentation or kept up with organizational record keeping, the buyer will be permitted to walk away prior to finalizing the transaction. Having business records in order will minimize the risk that the buyer will walk away because they cannot adequately assess the value of the business during due diligence.
4. Anticipate the difficult discussions:
No business is perfect and no one knows where the challenges of a business are better than the business owner. The seller must be prepared to be open about the challenges of the business but should identify strategies for improvement prior to having detailed discussions with potential buyers. Withholding “bad” information from a potential buyer is not a strategy. The withholding of known information can create a claim for damages by the purchaser against the seller.
The opportunity for business owners to sell their businesses continues to be strong and the price that those businesses can command continues to grow. With proper planning, a business owner can sell their business at an attractive price in a reasonable amount of time with minimized disruption to the operation of the business.
This information should not be considered a comprehensive discussion of business sales strategies, legal advice, or all that an owner should consider when selling a business. Should you wish to discuss selling a business and its implications, contact an attorney who can provide guidance tailored to your specific situation.