I continue to advise clients and other entrepreneurs that the best time to sell your business is when the business climate for your products and services has never looked brighter. Of course, intersecting with this condition is your motivation to sell. Is one of the following conditions present and escalating your desire to sell your business?
- Just ready to retire.
- Illness or Death has struck you, a family member or other owner.
- You and your wife are divorcing.
- You have a tremendous need for liquidity.
- You are tired of the burden of running a business every day.
- You are fatigued by the many personal guarantees and overall indebtedness.
There are many motivating reasons to sell beyond those that I have listed. I normally tell clients that if your books and records are not in good order, you need a 5 year horizon. Three years before you want to sell, meet with your accountants and lawyer to advise them of your intent. In the next three years, I would like you to do the following:
- Make sure that all income hits the books including any bartering you may have been doing.
- Eliminate any personal expenses you run through the company.
- Consider having your accountants review your financial statements for that 3 year period.
- Cut all expenses that are not absolutely necessary to run the business.
- Maximize revenues by reaching for all of the low hanging fruit.
- Consider other avenues to increase revenues with emphasis on those revenues that repeat from period to period.
- Consider hiring someone that can serve as your right hand man and help you achieve additional growth in the next 3 years. This person will be a prime candidate to run the business when you sell.
- If you have customer concentration issues (any customer with 20% or more of your business), implement a plan to reduce this concentration.
The key objective for the next 3 years is to show a track record of consistently increasing sales and profitability. When a potential buyer looks to buy your business, he will want to average the past 3 years of cash flow. However, we have been successful in persuading a buyer to apply the market multiple to the last and highest year of free cash flow.
What will happen with the last two years based upon our 5 year recommendation? I refer to this as Flexibility for Price Maximization. A Seller will realize the most value for his business when he is flexible in transitioning a new buyer to manage his company. We have seen employment agreements run anywhere from 3 months to 5 years with the most common period being 12 to 18 months.
Obviously, a lot more planning is involved in this process to optimize the sale of your business. Please feel free to contact me with any questions or comments you might have.