How To Prep Your Business For Sale To Get Maximum Value
Sarah Nicole Nadler
Being a business owner or entrepreneur means you have choices for early retirement that most people only dream of.
When I was eighteen I built my first $5-figure business in six months.
I went from making nearly minimum wage...to being the highest-paid person I knew among my peers.
And then I sold it!
I traveled abroad for a bit, did tons of volunteer work, and eventually settled in Oregon to build another successful business.
And then sold that one to travel the US with my husband, before investing in an event venue and Airbnb.
Each sale launched us ever higher - both financially and also toward our goals. We've knocked multiple things off our bucket lists using this strategy: trips to Hawaii and around the world, nonprofit and humanitarian work, spiritual retreats, etc.
This week on The Six Figure Biz ShowI want to share with you what I've learned over the years about preparing a business for sale, mistakes I've made that cost me tens of thousands of dollars (so hopefully you'll be smarter than I was about it!) and what I recommend if you're years or decades away from selling...but know its in your future game plan.
So, as always, let’s pull this problem apart.
How To Prep Your Business For Sale So You Get Maximum Value - Episode 93
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Preparing To Retire From Business
If you are like most family-owned businesses, your family relies on your income. And so in order to be truly financially responsible, you have to have a plan in place for how to support your family when you no longer want to keep your business.
The burning question most business owners have when they start to approach this topic of how to sell a business, is: How do I maximize the resale value of my business?
I have a 4-step framework that I have developed which works well for this:
Prep to Sell
Close The Sale
Step #1: Maximize The Resale Value of Your Business
Your business will typically sell for 1-10x its annual revenue (depending on a few factors including what industry you're in).
That's a BIG gap!
And you can increase the resale value in a number of different ways:
Avoid personal branding
The problem with a personal brand is...the person buying your business isn't YOU! So if you've built up your entire business around the trust your clients have for you personally, you are limiting your options when it comes to a sale.
If you want to sell your business for maximum value, document EVERYthing.
I keep a Google Drive folder called "Policy" where my team and I can access documentation and company policies that guide everything from our core values, mission statement and sales packages - to how to onboard a client.
Documentation makes it possible for someone ELSE to do what you do...exactly how you do it. And that makes these company policies VERY valuable to a potential buyer!
Follow these tips when creating your own documentation:
Keep the language simple. Avoid technical jargon or words that are easily misunderstood
Each policy should state WHY it is being written, HOW the process or system is done with step-by-step instructions, and WHAT the result is supposed to be
Build recurring revenue and/or repeat customers
It is often easier to sell something new to an old customer, than to go find a new customer. Systems for promotion to existing clientele, such as referral programs, reactivation & resign strategiesare a great way to build stable repeat customers. That looks very attractive to an investor or potential buyer!
Recurring revenue comes from having online courses, memberships, etc., and can also help your business to sell.
Step #2: Prep The Business For Sale
The best time to start preparing your business to be sold is at least 5 years prior to putting it on the market.
This gives you time to get your ducks in a row!
If you are <5 years from your desired retirement age, here are some tips for how to prepare your business to be sold:
Have a 3rd party determine the value of your business
Remember: your business will likely sell for 1-10x its annual revenue, so make sure your bookkeeping is in order before you approach a company to do a business valuation. They will need access to your financial information.
Learn to negotiate
Most of us learn this skill by necessity when we get into business, but it doesn't hurt to brush up on the basics before you start having conversations with potential buyers.
Don't be afraid to ask for what you want!
In order to do that...you have to know what you want. This may seem obvious, but a lot of business owners I speak to who want to sell their business are uncertain of what to expect and therefore hesitant to set firm goals.
Don't let fear or uncertainty regarding the process, prevent you from declaring, if only to yourself and your advisors, EXACTLY what outcome you want there to be!
Intending it firmly is the only way to get it.
Decide whether you are willing to only accept a lump sum offer, or will consider seller financing
If your business is worth more than $100k, you're unlikely to receive a lot of cash offers, unless you're selling to a corporation who executes a merger or buys you out.
Most potential buyers will either be your competition in town, an investor moving in, or an up-and-coming entrepreneur.
To buy your business they will likely need to secure funding. And if you cannot prove to their bank that your business is worth your asking price, you may not get the lump sum you're looking for.
But there is another option!
You can do what's called "seller financing". In this scenario, you enter into a contractual agreement with the buyer that loans them some (or all) of the money they need to buy you out. The buyer repays the seller in installments, with interest.
There are pros & cons to this approach:
Passive income. Each month, your buyer pays you a portion of the total value of the sale. This provides you with monthly income without requiring you to trade your time for it.
Higher total sale price. The sale price is higher than your original asking price because of the interest the buyer is paying you over time.
Risk of default. The buyer may not be as financially or business savvy as you. If they run the business into the ground and default on the loan, you may reclaim ownership of your business but it will be on you to build it back up to what it once was.
Develop a relationship with the right advisors
During this process, you may need the advice of several professionals:
a business broker to help you find a buyer,
a financial advisor (ah-hem! ;-) to help you maximize the value and negotiate a great deal as well as making sure you put that money to work for you when the time comes;
a lawyer to look over the final purchasing paperwork and contract of the sale,
and a CPA to advise you on the tax implications (capital gains can really bite you if you don't know what you're doing!)
The best time to build these relationships is BEFORE you enter into the most important negotiation of your career!
You need to trust your advisors, and that trust isn't built in a single phone call or meeting at their office.
Sarah Nicole Nadler is an investor and licensed financial advisor on a mission to help Americans stop trading time for money. When she’s not serving her clients, she geeks out on board games, writes fantasy novels, and explores the great outdoors with her husband Ben.