IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Vishal Punj of IBA. Mr. Punj is a successful entrepreneur, MBA degreed professional who combines his corporate, academic, and personal business experience to provide quality representation with superior customer service to his business sale clients.
Can My Business Be Sold?
Whether motivated by the prospect of a windfall and spending their days sipping a martini at the beach, moving on to another venture, retirement, or escape from a bad partnership it’s a question that entrepreneurs often want me to answer during my first meeting with them. I would often ponder the same question after a long day or tough situation with a customer, when I was an entrepreneur managing my own business. But wait a minute…if I have a good business doesn’t that automatically mean that my business can be sold? Not always. As a professional business sale intermediary the following are a few things a firm like mine, IBA, the oldest business brokerage company in the Pacific Northwest, looks at when assessing the market potential and demand for a privately held company or family owned business.
Clean Books
Nope, I’m not referring to how meticulous you are with the library you keep in the office. I’m talking about your financial records. By their very nature, entrepreneurs are action oriented. The ability to make a decision and move forward with limited data is an attribute that separates the entrepreneur from everyone else. What we’ve found however is that in the hurry to take action and subsequent scaling of the enterprise, business financials often take a backseat to operations. Assuming you’re using Quickbooks or some other type of accounting software, how often do you run a P&L and accounts receivable aging report? How readily accessible are your Employer Wage Tax Forms (IRS Form 941)? If you have a CFO, bookkeeper, CPA and or payroll company as part of your team, great. Have they made sure that your IRS and State Excise Taxes are current and filed correctly? Prior to taking a business to market, competent intermediaries will rely heavily on these documents to give an opinion of value. The ease with which we can get these documents is usually a pretty good indicator of how organized the entrepreneur is which directly impacts the transaction. If the financial records are a mess, this can be a red flag for a buyer. Put yourself in the shoes of the acquirer — if the financials are a mess, what does that say about the business as a whole?
Cash Flow
There are many types of buyers out there. Some are small investment groups that already own a portfolio of companies and see your business as a way to diversify their holdings. Others are empire builders who buy businesses that are complementary to other models they already own. However, the vast majority of buyers are individuals who are using a combination of retirement savings, personal savings, and business debt to acquire your business (this is especially true of businesses under the $5M enterprise value mark). I always like to ask my entrepreneurs to play devil’s advocate and put their buyer hat on. Starting a business from scratch is a high-risk proposition. In theory, acquiring an existing business that has a customer base and history of making money is less risky because the proof is ‘in the pudding’ that the business is viable. Aspiring entrepreneurs are looking at your business to mitigate their risk. If this weren’t the case why wouldn’t prospective buyers start their own businesses from the ground up? If I’m a buyer who has always thought of living the American Dream by owning a business but currently has a job at Amazon, Microsoft, Boeing, etc. to support his/her family, will I make enough after acquiring your business to pay the bills? It can be difficult for a seller to think this way because for them the company is more than just numbers on a piece of paper. What I often have to remind them is that for a prospective buyer your business is an investment. Over time they will make it their own but their immediate concern is financial. Does the business generate enough cash flow for someone to sustain a decent living? In theory, the higher the cash flow, the lower the risk, the higher market demand for a business.
Firing Yourself
Yes, you read that correctly, let me explain. As mentioned above, for many entrepreneurs their business is more than just numbers on a balance sheet or P&L. People engaged with the business from key employees to vendors to customers often share a close relationship with the owner with the performance of the business being tied to the personal bonds and trust that have been built over time. In addition we often see business owners who have made themselves irreplaceable, either because they really feel they’re crucial to the business or the refusal to delegate important business functions. In those situations the entrepreneur IS the business. In an ideal situation the business and the entrepreneur are separate, allowing ownership to be interchangeable. It’s always a relief when I meet a business owner who had the foresight to build a team around him/her that handles day-to-day business functions, with the owner concentrating on tasks such as strategy and management. Firing oneself from the enterprise doesn’t mean the business goes down with it, if the owner’s functions are more executive management in nature the business will appeal to a larger market of buyers who may not have a background in that particular industry. Ask yourself are you working “in” or “on” your business. The more you are working “on” the business in a management capacity strategically planning for the future and the less you are working “in” the business being a key cog to daily production, the greater the likelihood a sale will be on your horizon when you exit ownership.
Systems
A business is more than just the sum of its parts. Beyond employees, equipment, and inventory every business has a set of intangibles that are included in the sale. Business intangibles include the company’s reputation, industry know-how, and the way day-to-day activities are performed to allow the business to run like a well-oiled machine. These systems and processes can take years to develop and tweak. Qualified buyers will look across a spectrum of different industries and business types for the right ‘fit’, having well documented systems and processes including employee manuals, sales strategies, standard operating procedures, established designs, and ongoing research & development can add significant value to a company. If you want a business buyer to pay a premium to acquire your business, the more of this type of intangible infrastructure the better. The last thing a buyer wants is to have to reinvent the wheel. The most saleable businesses are the ones where business operations are so fine-tuned that for a new buyer it’s simply ‘plug and play’. A new buyer can now focus on execution and not have to spend countless years and headaches in trying to figure out what works and what doesn’t.
The list above is by no means the only blueprint you need to exit your business successfully. The selling of a business is a highly nuanced process and can be overwhelming if you’ve never sold a business before. Thankfully, this is where we can help. The role of a business intermediary is to hold your hand and guide you through the sale of what is probably your most valuable asset. However, the process always goes much smoother for all parties involved when you, the seller are prepared. One of my favorite habits from Stephen Covey’s 7 Habits Of Highly Effective People is ‘Be Proactive’. If your business is lacking in some of the points discussed above, that’s ok. Taking a proactive approach to get your business optimized for an exit is the quickest way to get a deal done and put more money in your pocket.
If you have questions relating to the content of this article, the process associated with preparing a business for sale, or selling a privately held company or family business Vishal Punj would welcome the opportunity to talk with you. Mr. Punj can be reached at (425) 454-3052 or vishal@ibainc.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.