Winners and Losers
There may be a large difference in the price obtained between the Losers (owners who continue to manage their business as before), and Winners,(those that consciously prepare it for sale).
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How To Prepare the Business for Sale
Preparing a business for sale has four components:
- Timing the sale during high growth or early maturity period
- Managing for cash
- Managing for growth
- Managing so as to earn a higher multiple of earnings
Timing the sale during high growth or early maturity period
Every business will go through four stages of a life cycle. Please see the graph below.
The smart time to sell is when the business has completed its growth stage and is beginning to mature. At this point the business will realise its maximum value.
Too many owners try to sell at the decline stage because they haven’t recognized that their business is in decline. Sometimes the decline is due to increased competition in a mature and no longer growth industry. The competition is fierce and the margins low, hence the whole industry is in decline. Sometimes owners lose some of their passion for the business and the business loses its competitiveness. Frequently the owners have not taken the time to devise or implement systems that allow the business to operate without them.
The high growth and early maturity stages are the ones that will bring the highest selling price. Consequently, this is the period we should be in at sales time.
Managing for Cash
A seller has some time to prepare the business and its elements prior to the sale.A business that generates more cash flow will bring a higher sales price than one that does not.
A qualified finance or accounting professional may be of assistance here. Among the options one may have:
- Faster turnover of working capital
- Divesting low return assets
- Making the operations more efficient
- Increased margins
Managing for Growth
Future growth will require strategies and executions that yield the following results: A buyer will be looking for a business that is:
- Achieving a strong cash position
- Achieving above-average profitability (in terms of return on capital invested)
- Obtaining rapid growth in revenues by targeting attractive, market segments
- Developing a strong brand
- Competing on non-price issues (e.g. quality, service, functionality)
- Achieving highly consumer centric behaviour
- Offering a strong value proposition to its market
- Developing a strong team with high-grade staff & good people
Each of the above will raise the value of the business and will bring a better price at sale.
Grow the Multiple the Buyer Will Pay
You have probably heard investors talk about the P/E ratio. The ratio also called the multiple is the result of the price that the company is worth (P) divided by annual earnings (E).
The multiple is the kind of return the buyer will want on their investment. For instance, if the multiple is ten, the buyer will pay ten times expected annual earnings. If the buyer can expect the annual income to be $100,000.00 the buying price will be one million dollars.
The lower the multiple, the less the buyer will pay. A multiple of five means the buyer will pay five times the expected annual earnings. The seller want the highest multiple, whereas the buyer will want the lowest multiple.
Again here with proper professional help you can increase the multiple a buyer will pay for the business.
Preparing a business for sale is no trivial matter. We have covered the timing of the sale and the preparations we can make to get the best price.
The vast majority of owners don’t plan for the sale of their business, and as a result they don’t take any steps to maximize their return on their years of investment.
That’s a symptom associated with owners that spend too much time working IN their business and not enough time ON their business. These owners don’t think in terms of selling their business at some point in time. Frequently, they view the business as a vehicle that provides them with an income and there is a rather fuzzy thought or picture involving a sale to fund their retirement.
This article served as an overview of the factors required to obtain a high return on the investments made in creating and managing a business.
Over here you can do a self assessment and rate your own preparation for exiting.
See here for what prospective buyers want from a business.