Tried and true tips to help you prepare your business for sale — and leave you with no regrets.
After years of running a successful business, making money and providing a great life for your family, you might think the time has come to retire and sell your company.
Great! I don’t blame you. I sold my company years ago and I have absolutely no regrets.
Of course, you want to get maximum value for your business. It can be tricky, especially if you’ve never sold a business before. Follow these tried-and true tips and you will get maximum value and head into retirement with no regrets.
As the business owner, here’s what you need to do to prepare.
Sell Recurring Business
Sell as much recurring business as possible. Purchasers will pay a higher multiple for companies when there is a higher percent of recurring business. Conversely, purchasers will pay less money for a business with a lower percent of recurring business.
Recurring residential and commercial business is defined as those clients that are on routine preventative maintenance programs and have scheduled service visits. Annual renewals for inspections that generate yearly revenue would count as recurring business as well.
Recurring business is key for reducing risk to purchasers and confirming that future revenue streams are stable.
Industry Standard Pricing
Make sure that your pricing for your service is in line with industry standards/competitors. Pricing below industry standards will come back to hurt you when you go to sell your company.
If you’re not sure about what your pricing should be, check out your competitors’ websites for price listings, attend your state association/industry events so you can benchmark with your colleagues, and speak with an industry consultant.
Strategic purchasers have a dollar per hour range for production that they expect from their acquisitions and they will often compare with their existing operations in that service area.
Upward Revenue, Yearly Increase
Ensure your revenue is trending upwards and that your company is not declining in revenue. Three consecutive years of increasing revenue is ideal.
Purchasers don’t want to buy a declining business. Acquirers want to purchase a growing company that is headed in the right direction.
Increase your prices on a yearly basis. If you are offering a good quality service this shouldn’t be an issue as far as attrition. While you may lose a few accounts, the gain or increase in revenue should far outweigh any loss.
Record Cash Payments
Record all cash payments received from customers and deposit them into your bank account. You may think that you have received a short-term gain, but you will get lower offers because buyers don’t often consider the value of unreported cash when valuing your business.
Profitability is another extremely important item to purchasers. You will hear the term EBITDA mentioned in M&A and corporate finance circles. Earnings Before Interest Tax Depreciation & Amortization is the measure of a company’s overall financial performance and cash flow.
This refers to your true net income after subtracting all direct (COGS) and indirect costs (excluding tax and D&A categories) from your revenue.
As a metric, selling companies with an EBITDA range from 15-20 percent or higher is desirable to purchasers since it shows them that the company is well run and can generate future cash flows needed to secure their investment in the business.
Be prepared to present completed tax returns from the last three years.
This is one of the first things potential purchasers request and review in more detail during due diligence.
Route Density, Fleet Maintenance
Build route density in your service area by keeping your customer base tight within geographic areas. Windshield time or driving long distance from client to client can erode profitability.
Keep your fleet of vehicles up to date with service, bodywork (all dents removed) and have your vehicle signage looking good.
Appearance is an important factor and impacts how your brand is perceived by purchasers.
Lean and Mean
Run a lean and mean operation without sacrificing quality service. Excess or unnecessary employees in any department will lower the net worth of your company.
We recommend reducing staff by efficient restructuring 12 months before you bring your company to the market, if not earlier. This will affect your EBITDA (profitability) and you will increase the value of your company.
We’re not suggesting letting employees go unnecessarily, only poor performers or employees in obsolete positions or positions whose tasks can be redistributed to other employees. However, make sure your team can still do all that work that is required in the timeframe needed.
Human Resources, Legal
Perform background checks, random drug screening of your employees, and also have non-compete agreements in place for your employees.
Non-compete agreements are highly desirable by purchasers since it shows that employees won’t take customers during the transitional period, which is significant especially if there is a Earn-Out agreed upon with the purchaser.
Note, you should consult with your attorney regarding a non-compete that can be assigned to a potential purchaser. Each state has different laws and regulations regarding the topic of non-compete.
Have your employees use up their personal/sick/vacation time each year. Avoid rolling it over to the following year since the purchaser most likely won’t assume accrued vacation days and it’s often the responsibility of the selling company.
It is recommended that you check with your HR department before making any changes in this area.
Also, handle any lawsuits/insurance claims before you go to market or have a plan in place for taking care of any unresolved claims. This will communicate to a purchaser that your business is healthy and you are making every effort to remedy the situation.
Operate your business from an industry related operating software/CRM and keep up with technology trends in your industry.
Having the latest technology in place such as hand-held devices, GPS tracking in your service vehicles, and smart phones and tablets will help improve daily efficiency and decrease the amount of money a purchaser will have to spend to update the infrastructure of your business.
Succession planning is a critical step if you as the owner plan to leave shortly thereafter the sale is finalized. Buyers don’t always have a bench of leaders to step in and take your place.
Empower your employees and delegate more so that the business can be streamlined to run as if you weren’t present. Otherwise, a buyer might fear that the performance of the business will be in jeopardy if the owner is planning to leave shortly after the sale.
Hiring a Mergers & Acquisitions advisory firm is highly recommended to obtain maximum value for your company and protect your interests. The firm also prepares a presentation of your company called a Confidential Information Memorandum (CIM), coordinates management meetings between buyer and seller, negotiates higher offers and more favorable terms, and guides sellers through the due diligence process.
Remember, as Donald Rumsfeld once said, “You don’t know what you don’t know.”
Most purchasers are sophisticated and utilize formulas to gauge how much recurring business you have, evaluate your pricing per service, measure your EBITDA/profitability and many of these tips mentioned above.
A lot goes into getting optimum value for your company when you sell. Spend the time now to check off all the boxes to create a competitive atmosphere as you follow these tried-and-true tips.
Don’t believe the myth that all companies of equal revenue are worth the same. Some selling companies are extremely valuable and others sell for a fraction of the going rate because they fail to follow many of these important tips.
As you prepare to sell your company, even if it’s in a few years, make every effort to grow and be as profitable as you can. Remember, you’re used to getting things right. And since you only get one chance to sell your business, do it right.