Positioning Your Business for Sale Smart business owners realize that selling their business is a once in a lifetime opportunity to capitalize on the investment they've made in building a business. They also know that selling a business requires a lot of preparation and hard work. In this milestone, you'll learn how to form an advisory team that will help guide the sale of your business. You'll then discover ways to make your business more attractive before letting potential buyers know it's for sale. Your efforts will improve your business, making it more appealing to potential buyers. In the end, your business may be so attractive that you just might want to keep it for yourself! Action 1: Form Your Advisory Team Action 2: Make Your Business Attractive Action 3: Target the Right Buyers Action 1: Form Your Advisory Team Assembling an advisory team to help you sell your business can be a big challenge but one that's worth the investment. The right advisory team can help you maximize the sale of your business and make the experience of selling a business a rewarding one. In this action you'll learn how to select a team of people whose experience and insight will help make the sale of your business a success. Form Your Advisory Team: Step-by-Step Your advisory team's role is to help you prepare for and manage the sale of your business, including closing the deal. The key is to locate resources with experience in selling a small business. These steps will guide you in selecting and preparing your team of advisors: 1. Locate an attorney and an accountant with experience in selling small businesses like yours. You may be lucky enough to already have on your team an attorney and accountant with experience in selling small businesses. If, however, your current attorney and accountant are lacking this experience, it's important that you search for professionals who do. Use your network of professional and personal contacts, industry associations, and even your current attorney/accountant to help you find these key resources. 2. Identify other advisors. People in your industry who have bought or sold businesses similar to yours can be an extremely valuable resource. If you have professional or business acquaintances with relevant experience and whose opinions you respect, ask them to advise you on the sale of your business. Their backgrounds may provide important insight that neither your accountant or attorney have. 3. Prepare your advisors. Once you've located your key advisors, tell them about your planned exit strategy. Ask for their advice and assistance in preparing for and carrying out the sale. They may provide you with immediate guidance, or they may wait until you have specific questions or need help on a particular task. Ask them to identify areas they think a buyer would examine or would want information about. This will help you start to prepare your business for sale. Form Your Advisory Team: Key Points Criteria for Selecting Advisors The following criteria should be used when selecting people for your selling advisory team. Professional competence. You want people who are good at what they do. The best people have a reputation that precedes them, which usually makes them easier to find. Relevant experience. An academic understanding of the preparation, valuation, and sales negotiation process is not good enough. You need someone with actual experience in selling a business similar to yours. Willingness to work with you. The selling process can be demanding. Tolerance for short deadlines, the ability to respond to your questions rapidly, and a willingness to be available late nights or on weekends is important. If your chosen advisor can't be available when you need him/her, consider selecting someone else. Notice that price is not included as one of the main selection criteria. As in other areas, when it comes to professional advisors you generally get what you pay for. Pay for the best team you can get; it will be worth it in the long run. Should I Engage a Business Broker? Many small business sales involve a business broker. A broker can help you sell by: Increasing the visibility of your business to interested buyers Bringing you high quality prospects Helping to smooth the negotiating process, acting as a buffer between you and the buyer Simplifying paperwork, speeding up the sale process If you work with a broker, you'll pay a hefty commission, as much as 10% or more of the sales price. This may be worth it if the broker helps you negotiate a price that's considerably higher than you could get on your own. If your attorney and/or accountant are experienced in the selling process, a broker might not add much value. If you decide to use a broker, choose one that has experience selling businesses in your industry. Ask around—the better brokers have established a reputation for themselves. There are two large organizations, VR Business Brokers and Corporate Investment International, which specialize in listing and selling businesses. Many smaller local business brokerage firms can be located through the Yellow Pages or via the Internet. Form Your Advisory Team: Example Alice Jackson managed Precision Detail, six auto detailing shops that were founded by her father. An accountant by education, Alice enjoyed being a part of a family-owned small business. Last year her father experienced a heart attack and decided to transition the business to Alice. He requested that Alice either keep the business and grow it or sell it for the best price she could get. Alice decided to form a selling advisory team. 1. Locate an attorney and an accountant with experience in selling small businesses like yours. Alice contacted Miles Winter, Precision's accountant and long- time family friend. A veteran CPA, Miles's small business experiences fit the profile Alice was looking for. Miles suggested that Alice contact Richard Downing, a lawyer in a local law firm where Miles was a board member. Downing was a skilled attorney, experienced in small business matters, well respected and known in the local business community. 2. Identify other advisors. Alice included her father on her selling advisory team. She felt his understanding of the business and his contacts in the industry would be critical to finding a buyer and negotiating a good deal. She decided not to work with a business broker because she thought she could locate a buyer from her father's network of professional contacts and work with her advisory team through the sale process. 3. Prepare your advisors. After identifying her team members, Alice briefed each of them on her planned exit strategy. Her advisors suggested several potential buyers and offered to help Alice select and approach a buyer when the time was right. Alice's father was particularly helpful in identifying aspects of Precision Detailing that needed to be improved before the company could be put up for sale. Action 2: Make Your Business Attractive Imagine that you're interested in buying a small business. What would you look for? You'd probably want a profitable business with growth potential, loyal and satisfied customers, well documented operating practices, and good employees. In other words, you'd look for a business with plenty of upside potential, one that presents you with enough information to assess whether the deal you're making is a good one. To make your business attractive to potential buyers, you need to think like a buyer. In this action, we'll help you see what it takes to prepare your business for sale. Make Your Business Attractive: Step-by-Step Thinking like a buyer means making your business attractive before the sales process begins. The steps you take will enhance the value or your business in the eyes of a prospective buyer, resulting in a faster and more lucrative sale. Taking these steps will also improve your on-going operation, which is beneficial even if you don't sell. The improvements may be so attractive that you may end up keeping the business yourself. The bottom line for you is that making your business attractive to a future buyer puts money in your pocket in the long run. 1. Eliminate unnecessary overhead/activities. Many businesses have products, functions, or activities that are unnecessary, inefficient, or a distraction from the core business. Get rid of those aspects of your business that might make a prospective buyer think twice about making an offer. You may have consciously ignored these areas in the past, but a prospective buyer won't. Eliminating unnecessary activities typically lowers costs and sharpens your focus. 2. Exploit any current sales opportunities. Are there promotional methods you can use to increase sales? Can you increase your sales efforts with your most loyal customers? Now is the time to bring in more revenue. This helps your business look better to a buyer and can increase your long-term profitability. The sale price of business will be higher too. 3. Update your business plan. Your business plan describes how you view the market— market size and growth dynamics, trends impacting your business, customer needs, competitive pressures and the like. An up-to-date business plan helps your buyer understand your strategic thinking and competitive position. 4. Update or upgrade your financial reporting and accounting practices, as well as your profit and loss, balance sheet, and cash flow statements. You can expect a buyer to ask for financial records for the last 3-5 years or since you've been in business. Your accountant will tell you which records you need. 5. Update or document your key business/operating practices and processes (non-financial). Review your agreements with employees and contractors, suppliers, vendors, and customers. Make sure they are up-to-date, complete, and readily accessible. Your buyer's "due diligence" effort will include looking at them. Most work tasks in your business will have procedures manuals and most machinery and equipment will have operator's guides. Make sure the information is accurate and current. Often, these procedures are an important and valuable part of what you have to sell. 6. Prepare a sales prospectus and "due diligence package." A sales prospectus contains information that helps you to sell your business. It organizes your thinking and saves you time. You don't have to verbally explain your business basics to every buyer over and over. Best of all, your prospectus helps you emphasize the most desirable parts of your business to a prospective buyer. A due diligence package presents essential information about your business for a prospective buyer to review. Its purpose is to aid in the process of investigating your business and the claims you've made about it. Make Your Business Attractive: Key Points Benefits of Building a Sales Prospectus A good sales prospectus can help you through the sales process. It's an executive summary that introduces your business to the buyer and usually includes: The name and location of your business Key selling features (why this is a good buy) Type of organization (S-corporation, partnership, etc.) Your asking price An abbreviated list of specific assets being sold Terms offered Specific advantages of creating a sales prospectus include: Cuts down the time required to explain your business to advisors and prospective buyers Helps you present the key selling points of your business Helps you compare your business to others and assess its competitive position Helps prospective buyers quickly determine if your business meets their needs Helps your buyer better understand the value he/she is considering Helps you justify the price you place on your business What to Include in Your Due Diligence Package Due diligence is the part of the selling process that the seller and buyer work together to complete. A prudent buyer wants to check out your business "diligently" to be sure that it's what you represent it to be. A prudent seller wants to ensure that the buyer is who he/she represents him/herself to be, especially if part of the deal includes seller financing. Listed below are typical components of a due diligence package for selling a small business. Choose the ones that fit your situation. Generally, having more quality information is better than less information. Be perfectly honest in your presentation; if you exaggerate or lie in a single area, your buyer will doubt your integrity in every area. This could cost you the sale and damage your reputation. Think like a buyer and you'll know what information you should include. A typical package contains: Key offer facts—name and location of the business, type of organization (S-corporation, partnership, etc.), asking price, list of specific assets being sold, terms offered Key selling features—why this is a good buy Financial Information—P&L, sales and earning histories, adjustments (for several years), salaries Liabilities—lawsuits, liens, list of assets pledged as collateral for loans Insurance carried by the business Business history Furniture, fixtures, equipment and facility, including lease information, if any Staff (employees)—names and roles, indicate whether they know about the potential sale or not, who plans to stay/go, salary and benefits information Customer profile, including customer trends and likely reaction to sale Competition Photos and map of your facility Sample marketing materials Copies of contracts and legal documents related to the business Communicating About Selling—Confidentiality is Key Use care when letting others know that you're selling your business. To the extent possible, control when information about your sale is released. Information made public too early can be harmful. For example, employees may react to your intent to sell by leaving for other jobs. Competitors who are aware of your plans might try to persuade your loyal customers to switch. Your customers might think you are less committed to providing them with excellent service if you're planning to sell. Ideally, the information about your sale is made public after you've located a seller and a deal has been made. How much to communicate depends on the situation, but think about what you make public before you speak. Make Your Business Attractive: Example Since Alice Jackson's father retired due to his heart condition, she decided that she really wanted to start a business of her own. She thought she'd enjoy a business that was more in line with her personal interests. Alice considered trying to operate the auto detailing shops and a new start-up business at the same time, but decided against it. Instead, she hoped to use her share of the proceeds from the sales of Precision Detail to help start her new business. After consulting with her attorney and accountant, Alice set out to make her business more attractive to a potential buyer. Here's how she did it: 1. Eliminate unnecessary overhead/activities. Alice studied Precision Detail from the point of view of an interested buyer. She knew that one of Precision's locations was doing poorly. On the edge of an industrial park, the location paid high lease costs, and fewer and fewer customers seemed to want to drive from the suburban areas to use it. Over all, it was Precision's least profitable location. Alice conferred with her father then decided not to renew the lease for the upcoming year. She told the employees working at the site that they could transfer to one of Precision's other locations. Also, Precision operated a drive through car wash at one of its detailing shops. The car wash machinery was functional but outdated. It was also difficult and expensive to maintain. Alice thought this asset should be eliminated. She had the washer rack dismantled and sold it to the car wash maintenance company for parts. 2. Exploit any current sales opportunities. Alice considered ways to increase sales at Precision's locations. She met with her father and Precision's key staff members and brainstormed sales ideas. Alice approved a repeat of the previous summer's highly successful coupon campaign to generate some new revenue. 3. Update your business plan. Alice and her father developed a statement of the market in terms of size and growth potential. Alice then asked her key staff members for their ideas. She also created a written marketing and sales plan by updating the previous year's plan. 4. Update or upgrade your financial reporting and accounting practices, as well as your profit and loss, balance sheet, and cash flow statements. Alice was not a CPA, but she understood Precision's financial situation exceptionally well. She made sure the company's balance sheet and profit and loss statement were complete and available. She had complete financial records for the last seven years. She also discussed the financials needed for a sale with her accountant, Miles Winter. Miles indicated the financials were in good shape but that they would require Alice to explain the history of the business and the company's cyclical sales patterns. 5. Update or document your key business/operating practices and processes (non-financial). Precision Detail purchased its supplies from a jobber with whom it had a long-standing professional relationship and a close personal friendship. It also had long-term contracts for advertising in the local business yellow pages and with the city's weekly local paper. Alice felt none of these relationships was a potential liability to a prospective buyer. She contacted the jobber's regional office and then paid them a visit to explain her planned exit strategy. The jobber said he respected her need for confidentiality about the sale information. Alice had developed a desk manual for the company's book-keeping and cash- management procedures while she was an undergraduate student. She reviewed them to see that they were current. She also collected the company's job descriptions, personnel records and policy information and filed them in a central location. Finally, she asked her operations supervisor to make sure the company's training manuals were up to date. 6. Prepare a sales prospectus and "due diligence package." Alice decided to create a sales prospectus and due diligence package for Precision Detail. The sales prospectus included a short company history, financial overview, maps and photos of all locations, brief descriptions of key employees, a vendors list, leasing information for Precision's locations, and a brief competitive profile. She also developed a sample of Precision's sales and marketing materials, coupon campaigns, etc. She created a due diligence package based on her accountant's advice. It contained a copy of the revised and updated Precision business plan (including budget), complete financials, her supplier database, Precision's customer mailing list, personnel policies and employee information, copies of lease information, and existing supply and service contracts. Action 3: Target the Right Buyers Selecting the "right" buyer for your business starts with your reason for selling. If you're selling because you're burned out and simply want to get whatever cash you can out of the business, then your ideal buyer is someone who wants your business and has adequate financial resources to make the deal. On the other hand, if you want to get the most money you can for your business, you'll want to be more careful about targeting and qualifying the buyer before you sign on the dotted line. Regardless of whether you want to sell your business to the highest bidder or sell it as quickly as possible, you need to target and attract the right buyers. Target the Right Buyers: Step-by-Step The following steps will help you identify potential buyers and determine which might be a good fit for you business. You'll develop buyer qualification criteria which you'll use to create a game plan for locating and contacting your "ideal" buyer. 1. Determine how your exit strategy impacts buyer qualifications. What kind of buyer would be best for your business? Typically, you want to sell your business to someone who has the financial resources to pay you for it and who has the management skills to operate the business successfully. Depending on your exit strategy, it may be important for the buyer to have other qualifications as well. Review the table below to match the implications of your ideal exit strategy with buyer qualifications. Exit Strategy Buyer Qualifications o Buyer must be able to pay you outright Your ideal exit strategy calls for you to sell or arrange suitable independent your business, play no continuing role in its financing operation, and have no financial connection to the buyer. o Buyer must be able to/want to operate the business without your involvement o Buyer must be someone who you can Your ideal exit strategy includes a role for work with well you in operating the business after it's sold. o Buyer must be someone who values your continued contribution and role in the business o Buyer must be someone who can operate the business successfully o Buyer must have solid credit history Your ideal strategy includes you personally financing a portion of the selling price, but playing no role in operating the business. o Buyer must be able to operate the business successfully List all buyer qualifications from the table above that are important to you. If there are additional qualifications relevant to your exit strategy, include them as well. 2. Identify potential buyers. Brainstorm categories of potential buyers who may be interested in owning your business. Ask your selling advisory team for their ideas and suggestions. To get you started, here are some categories of potential buyers: o Private individuals and partnerships seeking to own a small business like yours o Competitors o Businesses in a related industry that could benefit from owning your business o Suppliers o Customers o Employees or managers in your company Once you've brainstormed a list of potential buyers, choose the one or two categories you think will be most likely to produce a buyer. These will be your "target" areas—areas that you'll search to find a qualified buyer. 3. Develop a plan for reaching your target buyers. Finding a qualified buyer usually requires a marketing and sales process. Once you have completed the steps in Action 2, you have a desirable commodity to sell and a sales prospectus to help you sell that commodity. You now need to develop a plan for reaching target buyers that uses your sales prospectus to generate interest in your business. Your plan should answer these questions: o Who will you contact? o How will you make contact? o How will you use your sales prospectus to present your business? Target the Right Buyers: Key Points How You Find Buyers Makes a Difference Finding buyers for your business is a major part of the selling process. There are many ways to let people know you have a business for sale, including: Direct calls to prospects Confidential networking Trade association journal and newsletter ads Business-for-sale listings in the newspaper classified section or on the Internet Broker listings How you go about finding buyers depends on several factors: Industry practice The timing and specifics of your exit strategy The kind of business you are selling The kind of customers you hope to attract and sell to Make sure the approach you use to contact prospective buyers matches your business situation. For example, if you plan to sell a one-of-a-kind business that you created to a large company in your industry, then placing an ad in the business-for-sale classified section of the local newspaper is probably not the best approach. Understanding Buyer Motivation—Tailoring Your Sales Prospectus Consider typical reasons why potential buyers would want to own your business: Buyer Category Reason for Buying Maintain current employment Current employees Experience being an owner of a small business Make changes in the way the business is operated Investment growth Enhance their revenues and Competitors profitability Acquire your business assets, people, distribution capability, etc. Bring a supplier in-house (vertical Customers integration) Investment growth Control product quality Other Companies/Individuals Expand into new markets/diversify Investment growth Access to your company's customers Access to your company's assets Your sales prospectus can be one of the best selling tools you have. When you meet your prospects, you'll learn what's really motivating them to buy your business. Then, tailor your sales prospectus to their reasons for buying. Target the Right Buyers: Example Alice Jackson's exit strategy was to sell Precision Detail and use her share of the proceeds to fund another small business. She was planning to stay in the area, but she didn't want to be involved in the operation of the business after the sale was completed. Alice and her father wanted the new buyer to provide employment for Precision's current workforce. 1. Determine how your exit strategy impacts buyer qualifications. Alice's list of buyer qualifications included: o Ability to finance the purchase independently o Ability to operate the business successfully o Willingness to provide jobs (at least initially) for Precision's employees 2. Identify potential buyers. Alice consulted with her father and her advisors about the buyer categories that might result in a high-potential buyer. She identified the following target areas: o Competitors to Precision Detail o Businesses in a related industry 3. Develop a plan for reaching your target buyers. Alice's answers to the following questions became the basis of her plan for targeting potential buyers: o Who will you contact? Competitors: Alice knew the owners of several competing auto detailing businesses in the area. She compiled a list and reviewed it with her father. He was not sure how much interest they would have in purchasing Precision Detail, but she thought she would approach them personally and find out. Businesses in a related industry: Alice and her father belonged to a local business association that was a great source of contacts and referrals. Alice respected several members of the group for their business acumen and extensive contacts. She included their names on her list. o How will you make contact? Alice planned to arrange appointments with the target buyers on her list and visit them personally. o How will you use your sales prospectus to present your business? Alice decided on a three-part approach: 1. Test the potential buyers' interest in an informal, confidential meeting 2. If a potential buyer is interested in proceeding, ask him/her to sign a non-disclosure statement 3. Provide the potential buyer with the Precision Detail sales prospectus.
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