I literally receive hundreds of calls in a year from small business owners who tell me they’d like to sell their business…and they are somewhat in a hurry to do so. Religiously, during our phone conversation I go through my laundry list of questions to determine their real time frame, and ask the usual stock questions about the nature of their business, it’s current revenue and profitability, along with the reason for their decision to sell. With all honesty, I have yet to come across any business owner who has really thought his or her decision through thoroughly and planned their exit well in advance. And further, knows exactly what their goals are for transitioning the business to a qualified buyer.
During our face-to-face meeting with the owner, I dig deeper into the structure of their business, especially its financial state to determine its viability to be sold. As is natural, most business owners have no idea what the value of their business is and often listen to rumors from friends, brother-in-law, and acquaintances about businesses like theirs that sold for an exorbitant amount. Even when consulting with their professional advisors, such as their attorney or CPA, they receive wildly differing information, most of which is totally misleading. Most people I’m sure are well meaning when offering this advice, but once the owner has digested this sort of rumor it is difficult to change their mind, and can react negatively when confronted with the truth by a certified broker or valuation expert.
Quickbooks is Good, BUT, Garbage in Garbage Out
As my conversation progresses with the owner, their excuse for not planning their exit ranges from lack of time, to being too costly an exercise to undertake…and often they say, well you’re the broker, so this is for you to figure out, that’s why I called you. Only on very rare occasions have I been presented with current financials, which consist of exemplary P&L statements and an accurate Balance Sheet. More often than not, the P&L’s are not current, but worse still, have many inaccuracies which cast aspersions on the efficiency of their business. On one occasion, I even had an owner who was using Quickbooks for his accounting system and had counted their line of credit as revenue. However, the owner was quite oblivious to this error, which prompted my question, what was his accountant thinking when he prepared their taxes.
Accuracy and Transparency is Key
Because buyers these days tend to be better educated, it is essential that even if the business facility is not a clean and tidy as it should be, an owner who wishes to sell their business, should pay extra special attention to presenting the financial picture of the business. Accuracy and transparency is essential if the owner wishes to avoid any possible suspicion on the part of the buyer, since poorly presented financials will be red flags every time. In fact, not only financials should be well documented, but also, every aspect of the business should be committed to paper to tangiblize the business. This is especially true for a service business that has little in the way of assets, as in reality all that is being sold is the goodwill and customer list.
Have all Your Ducks in a Row
I recommend having all the salient facts about the business placed into a single binder that is sectioned and professional in appearance. This makes an incredible impression on any prospective buyer. After all, you have to be cognizant of the prospective buyers perceptions, which often influence a buyer, as this represents their reality. Younger buyers these days for example are quite sophisticated and expect a higher standard. In fact, there is a noticeable generational difference that can occasionally cause problems when a generation X buyer is talking with a baby boomer business owner. Generation Xers are arguably the best-educated generation with at least 29% obtaining a bachelor’s degree or higher. Their expectations are higher and they are much better equipped to handle the complexities of business ownership.
Owners Bad Habits
Perhaps the worst offender for creating a bad impression of any business being sold is having a disheveled balance sheet. This more than anything else can turn off any buyer instantaneously. Especially, when it comes to the accounts receivable versus the accounts payable. Many owners I have worked with were not very efficient in their invoicing and collections, consequently this resulted in poor cash flow and always having to hustle to cover weekly payroll. One owner in particular was so bad at this basic business operation, that they had maxed out their personal credit cards to cover payroll. Continuation of this habit could easily lead to bankruptcy regardless of the firms revenue…keep in mind cash (flow) is king. Of course this would be unnecessary if a well-oiled system had been in place to maintain an efficient cash flow.
Exit with Dignity
Another sin is the owner who feels that he or she is indispensible…they still make all the decisions and live at the top of their self structured pyramid. The owners employees know exactly what do at their level, but would cease to function if confronted with a decision or task in another area of the business. Any owner that can’t take a day, off let alone a week or more has an unsellable business, especially for hands-off management type buyers. There’s more to tell, but I’m going to leave that for another blog article. So, preparation is the key to a successfull exit. Suffice to say, if you’re a small business owner start planning your exit at least 2 to 5 years before the event, you’ll at least then be able to exit under your own terms and not those of the bankruptcy court, which would be an expensive and agonizing end to your business life.