Yesterday at a small business group function the question was posed “How do we sell our business?”
To many business owners, their business is their baby. They’ve spent years, possibly decades, building the business and learning from their own mistakes. But now, it’s time to start thinking about selling your company and reaping the spoils of a hard-working life.
Selling a business is a broader topic than we want to tackle in an email or blog post, however we can give you three basic guidelines to sell your business at a premium.
Premium Over Book Value
Generally speaking, every business has a book value based on financial statements, assets and liabilities. Take what you have, subtract what you owe, and that’s your starting point.
To get a premium over that value, many small business owners see the intangibles, because frankly, they’ve worked for those intangibles for years. Things like reputation and industry knowledge can be difficult to assign a dollar value, but the business assets are worthless without them.
I’ve even seen business owners trying to sell their business, but offering their own services for six months to a year to continue operations. Situations where this works well are few. If the transition is smooth and profitable, the business would have been worth more money. If the transition is bumpy, you’re still around to witness buyer’s remorse. I never recommend working in a business you have sold.
Three Intangibles That Add Real Value to Your Business
I’ve identified three things that are easy to quantify when it comes time to sell.
- Flawless record-keeping (transparency and honesty)
- Brand (reputation)
- Systems (industry knowledge)
Let’s look at each:
Flawless Financial Statements, and more
Book value surprisingly can be a function of appearance as much as dollars and cents. Many small businesses on the market, even well-run quality companies, have financial statements that don’t tell the whole story.
In particular, there are tax advantages and perks of owning a small business that you want to avoid on the balance sheets and profit statements. As a sole proprietor or limited partnership, one of your goals is to make your income on paper as small as possible so that Uncle Sam’s slice came from a smaller pie.
Other business decisions would be made more frugally. An owner operator may choose to lease a Mercedes, whereas a hands-off owner may see a basic sedan or a delivery van is a better investment.
Buyers want assets and profits, however most understand how a business can be streamlined under new ownership. Making life easy by having excellent records will likely draw a better offer.
The Value of Branding
You’ve built a reputation for your business, much of it based on personal passion. That passion can be valued as brand awareness. Mario’s Pizza has a strong brand even after Mario is well removed from the picture. Examine what makes your company great from an outsider perspective, and educate your buyer.
It’s also important to be realistic. If no one can cook like Mario, the reputation may go away if he leaves. If Mario trains the next pizza tosser, whom can remain with the business, the value is no longer tied to the owner.
Owner operators have to be able to separate themselves from the business without impacting the brand.
Also remember to claim assets related to your brand. Register your trademarks, clean up your marketing materials, signage and physical facilities, and renew your domain names. Make sure the new owner is buying a business with low potential headaches and they will reward you with additional cash.
Standard Operating Procedures, Systems and Technologies
Most owner operators used the tried and true method to develop their systems. It’s called “trial and error”. Unfortunately, your mistakes, while valuable, don’t add book value.
However, they can.
Go through every element of your business and create a how-to manual of standard operating procedures.
Your sales routes, vendor list, equipment suppliers and even identifying outsourced labor shows that you have the ability to sell a business that will continue to operate independent of its original owner.
Identify any unique technologies or applications you’ve developed for your business, and make sure to educate the buyer about the benefits of the tech and the investment you’ve made in development.
Think about the concept of franchising. In this industry, the primary product is a set of “how-to” instructions. If I’m buying a Subway or McDonald’s, I’m investing hundreds of thousands of dollars in two things, brand awareness and a set of instructions.
As a business owner operator, compete as if you were selling a franchise, and you’ll often get a premium price for your business.
Perception is Reality
One of my favorite real life examples was a small health care provider in Michigan. The company was profitable, but most of its assets were people. The owner did two things. He hired a graphic designer to create a new logo and a bunch of new printed literature. Then he hired my firm to build a modern website that was attractive and integrated the new brand. Lastly, he created a beautiful printed and bound collection of financial documents, vendor lists, and maps of territories he currently served.
He invested roughly $6,000 in printing and design and another $2,000 for beautiful lobby signage.
His $8,000 was well spent. When the business sold he was offered $200,000 over the value based on income statements alone.
The irony is his company was purchased by a regional health care company, who promptly disposed of all the printed literature, took down the websites, and gave him the beautiful lobby sign which now resides in his rec room.