Preparing Your Business For Sale
The Importance of Preparing Your Business for Sale in Advance
The decision to divest your business is among the most intricate and challenging choices an entrepreneur faces, and once the decision is made, the truly demanding work commences.
Numerous corporate and sophisticated buyers either acquire or establish a business with a clear exit strategy in mind. Often, business owners initiate or acquire and manage a business without much consideration for its eventual sale, at least until the moment arrives. The decision to sell a business, whether in Los Angeles or elsewhere, might be influenced by factors beyond the owner’s control. In other instances, it may be a personal choice based on the optimal timing for a sale.
Effectively preparing your business for sale can significantly enhance its value and attractiveness to potential buyers when it’s time to enter the market. If feasible, it’s advisable to begin planning one to three years in advance to adequately ready the business with the objective of maximizing its value.
Our consultants often encounter the question, “How can I ensure that my business is adequately prepared to showcase its true market value and secure the best possible price?” Initiating early collaboration with Keystone Business Advisors can yield significant benefits in the long run. One of our M&A advisors will assist you in pinpointing critical weaknesses and hurdles that, if effectively addressed, could substantially enhance your business’s value.
Outlined below are some of the key components to consider before selling a business in Southern California. If you seek additional information or have specific inquiries, please reach out to us, and we will promptly address your concerns.
- Understanding Marketability
- Financial Performance Indicators
- Infrastructure and Human Resources
- Personal Objectives and Goals
If you are serious about selling your landscaping business now or in the future, we encourage you to register for consultation. All information and discussions will be kept strictly confidential.
Awareness of Marketability
This aspect is arguably the most comprehensive factor for a prospective seller to contemplate. Sellers need to understand that the optimal time to sell their business is during periods of overall prosperity, both for the business itself and the specific industry it operates in. This is when the business commands a premium and is most attractive. However, businesses are often sold not necessarily at their peak but somewhere in between the highs and lows, whether in a growth or decline phase.
Sellers should evaluate how their business compares to the broader market and competitors. Additionally, understanding market expectations for expansion, contraction, or consolidation is crucial in the context of business sales and acquisitions. Another key consideration for the marketability of the business sale is its competitive advantage and market position.
For example:
- Does the business cater to a broad or niche market?
- Is the company perceived as a leader in the market?
- Does the company possess any competitive edge?
- What are the entry barriers for potential competitors? Are startup costs low or high?
- For service-oriented businesses, what are the demographic conditions in the local area?
- What is the future outlook or development plan for the region?
These are initial considerations that provide sellers with a comprehensive understanding of the M&A landscape concerning their business and industry.
Financial Performance Indicators
Is the past and present indicative of the business’s future earning potential? In simple terms, buyers acquire businesses with an eye on future earnings, using historical performance as a guide. This is a challenging task and a focal point in the selling process. Ideally, sellers should demonstrate a consistent trend of profitability and growth over the preceding 3–5 years to strengthen the forecast for future earnings.
The more stable and predictable the financial situation, the more favorable the pricing and terms for the seller. However, it’s important to note that, as a general principle, a buyer invests in potential but seeks to pay for the current value. The negotiation often settles somewhere in between, especially for robust, growth-oriented companies. The insight and guidance of a business broker or M&A advisor are crucial in helping buyers recognize and sellers achieve higher value.
Nevertheless, this financial perspective is subject to multiple interpretations, and not everyone will perceive it in the same way. Financial statements and net income or loss represent only one aspect of the picture. Businesses aim for reliability and diversity but can be diverted by various economic conditions or the demanding requirements of key accounts, leading to a decline in predictability and an increase in risk.
Business owners need to consider several factors (to name a few) that could influence marketability and business valuation:
- Concentration of accounts
- Quality of financial statements and tax returns
- Economic outlook for the market
- Gross margins and other industry comparative ratios
- Additional capital expenditures required for growth
Beyond analyzing financial statements, these are crucial considerations that can impact the fair market valuation of the business. Business owners should take these factors into account when setting selling expectations.
Infrastructure and Human Resources
Another crucial aspect that sellers need to be mindful of is the significance of the existing business infrastructure. Entrepreneurs play a pivotal role in establishing and growing the business. However, it is essential to assess whether the owner/operator will continue to be a crucial part of the business in the future and how easily replaceable they are. If the business is heavily reliant on the owner alone, selling becomes more challenging and typically requires the seller to have an ongoing role.
In cases where the seller continues to play a role, additional consideration must be given to the market value of the business and compensation for the seller. If the buyer needs to pay the seller a fair market rate for their ongoing services, it could impact the company’s earnings during that period. This often becomes a negotiation point where employing a “give a little to get a little” strategy can be beneficial. Sellers need to weigh what is more important at the time of sale:
- A higher purchase price and upfront payments with a slightly lower ongoing salary for the transition period or employment contract; or
- A slightly lower purchase price with more potential for an earn-out and a more aggressive ongoing salary.
Understanding this beforehand allows the seller and M&A advisor to devise a negotiation strategy.
Buyers will also scrutinize the working capital and additional capital expenditures post-acquisition. The existing human resources and access to skilled personnel are critical factors. To facilitate growth, it’s important to assess if the right staff is already in place or if additional skilled and experienced personnel will be required. This illustrates another perspective from the buyer’s standpoint and how they might approach the acquisition opportunity.
Personal Objectives and Goals
The successful sale of a business and the satisfaction of the seller hinge on whether the sale aligns with the goals initially set by the seller. To achieve this, a seller must navigate two distinct perspectives regarding the business sale: their own needs and goals versus those of the buyer. An M&A advisor or business broker in Los Angeles can delve into these aspects in detail to help a business owner make informed decisions.
Firstly, the seller must establish goals for their position 12, 18, or even 24 months after the sale. Considerations such as retirement with a specific financial cushion, reinvestment in another business, securing an employment contract with the new owner, or other motivating factors need careful evaluation. Additionally, when determining the price, the seller must weigh whether time or money takes precedence. Some sellers set a specific price target and are willing to wait until it’s achievable, even if it means focusing on growing the business to justify the desired price. Others prioritize getting out of the business within a year, even if it means adjusting the desired price. What type of seller are you?
Secondly, close collaboration with legal, tax, and financial planning advisors is essential. A reliable Southern California-based investment banker or business broker will work closely with your CPA or accountant to discuss tax planning and purchase price allocations, minimizing taxes. Consulting with your attorney ensures all required disclosures are made to mitigate risks after the sale. If retirement is in your plans, have you confirmed with your financial planner that you’ll have sufficient funds? Keystone takes a collaborative approach, working directly with your key advisors to protect sensitive information, avoid uncertainty, and maximize after-tax proceeds.
Thirdly, the seller must recognize and accurately present the true earning capabilities of the business. Buyers expect to pay or receive a salary in line with industry averages for the operator’s position. Earnings must cover the debt service on the business purchase and provide a reasonable return on the initial investment. Buyer objectives vary; some seek immediate compensation and return, while others view the initial growth period as part of their investment. Some are attracted to perceived synergies or cost savings through consolidation or centralization of certain functions.
In conclusion, if the needs and objectives of both buyer and seller align at a price and structure that makes sense to both, a successful sale is within reach. However, it’s crucial to be aware that various obstacles may arise along the way.
Is now the right time to sell your business?
Reach out to Terranova Business Group to manage the sale process.