Operating businesses are generally valued on a “going concern” basis, meaning that the business will continue to operate for the foreseeable future. When buying a “going concern” business, what you are actually purchasing is a stream of future cash flows earned by the business. Since future earnings are often hard to predict, buyers will typically look at the historical earnings of the business as an indicator of what the business will earn in the future. This means they will only be confident in buying your business if your financial statements accurately reflect the earnings potential of your business.
So, review your business finances early to avoid unwanted surprises later on in the due diligence stage. Be sure they accurately reflect your operation and are up-to-date. There are some common questions a buyer will ask, and now is the time to prepare answers that will satisfy the buyer and reaffirm their interest in your business.
Here are some tips for preparing for the sale of your business:
- Understand and know your profit margins on each revenue segment of the business.
- Know the breakdown of sales and profitability by location, if applicable. Does the business earn recurring revenue? Are there any contracts in place with customers? And, are the contracts transferrable to a new owner?
- Ensure you have a good understanding of your customer base. Do you have any significant customer concentration? What is the percentage of total revenue that each of your customers generate year by year? What industries do you serve? What geographical area do you serve? Are your customers mostly local, regional, international?
- Do customers generally pay on time? If your customers have a history of cash flow issues, this may deter potential buyers and should be something that is dealt with before selling your business.
- Regularly examine your costs and pricing. Are they in line with your industry? Is there room to increase prices or cut costs?
- Are accounts payable paid on time? Do you take advantage of cash discounts? Paying interest and fees on overdue accounts regularly can lead to decreased profits over time and a lower business value.
- Identify any extraordinary expenses that were incurred in the past as these will not occur again and should be adjusted for when calculating the earnings potential of your business.
- Compare each year’s performance to the prior years. Start a report that compares your financial performance each year. When necessary, explain the reasons for any variances. Doing this each year ensures you will be well prepared to answer any questions a potential buyer has about the historical performance of your business.
- Regularly compare your company’s performance to industry benchmarks. If you have too much inventory, that means more of your cash is locked up in the business, and the excess inventory is likely hurting your profits too. If inventory is kept right-sized, the company will be more attractive to a buyer.
By following these tips, you will be better prepared to sell your business when the time is right. The process of selling your business can take time, and preparation for a sale should occur well before you list your business for sale. If you have any questions about selling your business, contact one of our trusted business advisors today.
Thinking about selling your business? Download our free e-book on exit planning here.