Expert Advice for Owners

Preparing the business for sale:

If you are thinking of selling your business below is an outline of ten known strategies for maximizing the value of your company in order to prepare the business for sale. Some action items can be implemented immediately, while others take time to execute. Each will bring a strong Return On Investment upon sale and most will also improve your profitability and enjoyment of the business until that time. A good tip to remember is this simplified formula for business valuation: Value = [profit, or more precisely a Seller’s Discretionary Earnings divided by the risk. All the methods below will either increase profit and/or reduce risk. You will find them below in estimated order of the impact they have upon execution.

Enhance overall financial execution of the business.
If it is true that the value in real estate is driven by "location, location, location" in business it's driven by "financials, financials, financials". Increasing profit has a more than proportional impact on value; e.g., doubling your profit will typically increase your business value 2.2 to 2.4 times. In general, buyers of Northern California small businesses need to see a minimum of $150,000 in annual profits, and interest in your company will increase exponentially with profits above that level. Buyers value, in addition to bottom line profits, strong revenue growth and high gross and net margins.

Clean books and records, specifically tax returns.
An old business brokerage adage reads "you are paid on what you can prove, not on what you earn." Proof in the world of small business sales primarily means your business tax returns. Anyone can claim they are making an enormous profit. Buyers, especially in a market as sophisticated as the San Francisco Bay Area, will believe the profit is real when it is proven, usually by paying taxes on it, at the corporate level and/or on your owner W2 compensation. Buyers understand that Northern California business owners want to minimize their tax obligations, and expect to see some "discretionary expenses" paid for by the business. But to gain maximum value, those expenses must be a small percentage of the true total profit, well documented with receipts, clearly discretionary in nature and appropriately categorized on your tax returns. Buyers will also want to see GE tax returns consistent with the federal returns, and bank statements verifying the advertised cash flow.

Secure a long-term lease.
For location Northern California dependent retail and restaurant businesses, the lease is the critical risk factor that can determine the value realized upon sale. In general, the longer the lease term (and options to extend), the better. When renegotiating your lease, make sure the lease is assignable without excessive restrictions or financial penalties or payments. Pay attention to the rate at which your rent is raised and compare it to the rate at which your sales numbers are growing, then make sure that your sales are growing faster than the cost of your rent. Never just assume that your landlord will extend your lease or let you assign it to a buyer. Obtain all negotiations in writing.

Diversifying the customer base.
For non-location specific businesses, high customer concentration is often a big risk factor for a new buyer. If one or only a few customers account for a significant portion of your revenue, buyers will make lower offers and/or will often opt for making deferred payments which are contingent upon customer retention after the sale. Even if you are 100% confident that your key customers are loyal to you, a prospective buyer will want to be assured that the customers are not only loyal to you, but to the company. A good solution is to bring on new customers, therefore diversifying your revenue base. Another possible, yet less effective method is to put customers under written contracts that include a provision allowing you to assign the agreement to a qualified buyer.

Diversify your product/ service base.
It can be a good idea to diversify your product or service base to include additional services or products, unless it is certain there will always be a demand for your product or service. When making new offerings, remember that buyers look for companies with regular recurring revenue streams. Northern California businesses like security alarm companies or property management firms, which get paid monthly from hundreds of customers, sell for exceptional premiums. Find opportunities to add products and services such as long term maintenance agreements, retainers for professional services, or automatically charged renewals or annual upgrades and which have recurring payment streams.

Strengthen your team.
Business owners know that it is difficult to find good employees. The number and quality of managers and employees in a company's team increases its desirability. If your company would be severely damaged by any one employee's departure, it is crucial to recruit and/or train other employees that would be able to carry on that person's duties, thereby decreasing the risk of company disturbance in an emergency. Recruit part time employees to cover less desirable shifts and to fill in for sick or vacationing employees. It is also a good idea to replace family members in the business with non-family employees if possible. Eliminate problem employees and address any current or potential labor disputes before bringing your San Francisco Bay Area company to market.

Strengthen operations and marketing systems.
We can look at franchised businesses as a model for how a business should look when trying to sell. Northern (change spelling of Northern) California Franchised businesses consistently sell for a significant premium to independent businesses due to nationwide brand name recognition, which is nearly impossible for a local only business to replicate. Another part of the premium comes from the strong support and well documented operational, marketing and administrative systems franchisors provide their franchisees. By creating similar and solid systems, you will greatly increase prospective buyers' confidence that they will enjoy the same success as you, without having to do too much initial work at trying to refine processes, and thereby increase what they are willing to pay to purchase the business.

Secure key suppliers.
Any business owner, wants to secure exclusive rights to sell any product or services, even if the exclusive territory is limited. Exclusivity leads to higher and more secure margins and profits. If exclusive arrangements are not possible, try to negotiate long term assignable supply contracts. Find ways to create barriers to entry for competitors.

Upgrade equipment and facilities.
It is important to continue to run the business according to the highest standards even while contemplating a sale. Those sellers who choose to cut back on equipment maintenance and upkeep will take a significant price cut if buyers can see that the business has not been run up to capacity. That said, it is generally not a good idea to make larger than normal capital investments in the 1-3 years preceding a sale.

Make the business less dependent on you.
Buyers need to feel confident that they can run your Northern California company successfully after you depart. By developing your employees and systems you will get a big head start on this issue. If the owner works full time hours and has little ability to take vacations that is a good indicator that the business is too dependent upon the owner. Businesses in which the owner works few hours and can take extended vacations are much more desirable to own - and sell for a significant premium.

We hope this information is of use in building your Northern California business. Call us anytime for a free, confidential estimate of the value of your business.