Many small business owners wait too long to prepare their business for sale and consequently leave money on the table when selling. Some owners never plan to sell and others simply get caught off guard by an unexpected illness or unfortunate event. It is best to start preparing your business for sale as soon as possible. Here are several tips to help you increase the value of your business over the next year or two.
Clean up your books: Most business owners write off much more than just the required expenses of their business, whether it is a personal automobile or meals and entertainment. The value of any business is directly linked to the profitability of the business. If you have minimized your profitability to decrease your tax burden, you will not maximize your selling price. Make sure you are only expensing what is absolutely necessary, even if it means paying extra taxes.
Replace any family members with unrelated staff: If you have family members working in the business, start to replace each one with unrelated staff. When a buyer looks at your business, it is riskier and therefore less valuable if there will be substantial turnover after the purchase. Also, family members are often not paid market wages which is difficult for a buyer to determine, further decreasing the value of your business.
Note abnormalities in your financials: When a buyer looks at your business or a professional values your business, they will want to know about any events that were unusual. For example, if you own a restaurant and had a flood, make sure these one-time flood expenses are not counted against you when the business is being valued.
Design your business on systems: Your business needs to run without you. Otherwise, there is little value to your business when you leave after the purchase. Every major task in your business should be documented so that your current staff knows exactly what to do without having to consult you. For the buyer, this documentation provides assurance that the business is likely to continue after the transaction.
Grow the business: Now is the time to ramp up your marketing, sharpen your sales team, and have a solid plan for growth. Buyers pay more for growing businesses than ones that are stagnant. If you can show ten percent growth each year for the past three years, for instance, the buyer is likely to believe the growth will continue and pay more for your business.