Selling a Business: The Planning
3 March 2025: Selling a Business: The Planning
Planning?!? Selling a business takes planning?!? Who knew??
Well, most people who’ve followed this blog for any length of time certainly knew. We wish more business owners did.
Every year, thousands of independent businesses change hands — sometimes due to industry shifts, new opportunities, retirements or simply being “the right time”. But behind every sale is a complex process of legal considerations, financial decisions, and strategic planning.
In our experience over the last nearly 25 years, the larger the business the more the owner understands the importance of planning the sale, but ALL owners should understand the planning process. They need to be aware of the issues that are important to buyers and what, if anything, an owner can do as part of that process to increase the value of their business.
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The extent of the planning needed to increase the chance that the business will sell for the highest valuation in the shortest amount of time is beyond the scope of a single blog post but let’s look at five aspects of a business that are important to buyers.
• Geography. Is the business located in an area that is growing? If it serves local customers or other generally local businesses, knowing that the market is growing is a positive aspect for buyers.
• Gross Profit. Many business owners believe their business should sell for a multiple of sales or revenue, but buyers are looking at profit. They want to know the answer to the question, “How much money will this business put in my pocket this year?”
• Technology. Do you have modern equipment? The right technology?
• The General Economic Outlook. Are buyers and lenders feeling confident about the future? Is the general business attitude positive and enthusiastic?
• Quality Accounts. Do you have a strong core of contracted business?
A business owner has some control over some of these things and you should exercise that control where you can. While you cannot control your location or the general economic outlook, there are many factors that can be controlled with long-term planning.
When we work with clients who have a multi-year timeline for the sale of their business, we stress focusing on the aspects of the business they can control to increase the value and attractiveness of their business.
- Contracts and Leases. Are your key accounts based on a handshake deal? Buyers want the security that contracts offer. With some exceptions, it’s good to avoid long-term leases as part of your long-term exit strategy. Buyers will definitely consider any burdensome leases a negative factor. That being said, buyers want stability. A long-term facilities or premises lease is often in the buyer’s interest. Buyers rarely welcome the prospect of facing a lease negotiation soon after acquiring a business. Even worse, the prospect of having to relocate the business can drive otherwise qualified buyers to another business opportunity.
- Recurring Income. Buyers love any income that is totally predictable. From network security businesses and alarm companies to HVAC and landscaping contractors, service contracts are now commonplace in many industries and are of high value when a business is sold.
- Management. Are you top-heavy in this area? This can be a serious drawback to some buyers, especially those who see trimming the top ranks as one way to streamline the business because such buyers will wonder why the current owner has not done this pruning him- or herself. If streamlining is possible, get it done before bringing the business to market.
- Profitability. This is often the most important metric to buyers. There are many ways to increase this number, not least being the aforementioned trimming at the top. Examine your expenses closely and consider what the business can do without. But also consider how you might increase revenue without having to expend your customer or client bases. (See “Pricing”, below.)
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REALTORS! Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Don’t Miss Out on the “Silver Tsunami”!
- Technology. If you’re tracking sales with Lotus 1,2,3, producing financial statements with Peachtree, or generating invoices with a “proprietary” template created 15 years ago by your then 13-year old son for his junior high school science project, you will drive off buyers like kryptonite repels Superman. Make the conversion to the same name-brand technology providers that buyers are using. A budget-oriented technology choice is a negative factor that will require costly changes.
- Pricing. Are you competitive or are you underselling your market? Will adjusting your prices up – gradually over the next 18-24 months – negatively impact your client or customer base? Raise your prices – gradually – to the appropriate level to make your company more attractive. Planning makes that possible.
- Financial Statements. This is a BIG one. I hope it’s no surprise to hear that buyers want to see full financials: profit and loss statements, balance sheets and tax returns; not just current ones but historical – at least three years. These documents must bear two very important characteristics: First, they must be both comprehensive and easily understood. Second, they must “make sense”. When we refer to the financial documents making sense, we specifically mean that the tax returns and P&L statements MUST closely track each other. Buyers understand that most small business accounting software can be manipulated with little downside to the owner but the consequences of a fraudulent tax return are severe enough that few owners will take the risk falsification entails.
The Bottom Line
There are three stages to any business: the starting, the growing and the selling. Most people work in the first two, rarely considering the last stage – until the time is suddenly upon them.
The importance of planning for the sale of a business long before bringing it to market cannot be overstated. It is so important, in fact, that when we advise entrepreneurs who want to start a business, we begin by asking them how they see their ownership in the business ending because that is what has to be planned for.
“If you don’t know where you are going, any road will get you there.”
– Lewis Carrol
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at
jo*@Wo*******************.com