After you have decided to get your business ready to sell or you have decided to go ahead and start the actual selling process, the next step is to prepare the business to go on the market. The goal is to make the business attractive to potential buyers. While many different things attract different types of buyers the one common denominator among all buyers is profit. To make it as simple as possible the more money the business makes with the least amount of effort on the part of the buyer means a higher multiple paid for the business. When you have a business that is in an exploding industry like bitcoin or has enormous future earning potential like Tesla or SpaceX then your multiples can be even higher. At the end of the day, you are selling the value of future income minus risk. The more you show the potential for income and the more you eliminate risk the higher the selling price you will receive for your business. So exactly how do you show future earnings potential and risk reduction?

     Your business needs to communicate its story effectively. Everyone loves a good story about who you are, your passion for solving their problem, and how you do it best. The most effective way at telling this story is a process called Storybrand. You can buy the book on Amazon, and you can even take the class online to learn how to effectively tell your story using the Storybrand process. Just Google Storybrand and you will find the sources. You can also skip all that effort and just hire a certified Storyband company to help you write your company and your product story. Our advisor team uses Storybrand certified guides. Potential buyers that are experienced in the world of business will immediately recognize a professionally created marketing story like Storybrand.

     Your business needs to look like a market leader. This means you need an up-to-date website, fresh marketing materials, and an effective marketing system. You should be spending 5% of your gross revenue on marketing. You should evaluate how your business is perceived by looking at your employees, your trucks, your marketing, and how you communicate with customers. You see your business from the inside. What perception do your customers and your potential buyer have about your business? Does it look professional, cutting edge, clean, and highly productive?

     A buyer will also make a purchase decision after 10-15 minutes of walking around your shop. Are their warranty return parts cluttered around their office? Is there a weird smell in the building? Is there trash everywhere? Or is the office neat, freshly painted, clean, and organized with new carpet? Is the warehouse orderly with everything in its place, an install schedule written on a whiteboard, and paperwork stacked in trays? What a potential buyer sees in the first impression determines whether they “want” to buy the business or “will” buy the business if the price is right.

Have a competitive analysis completed

     See where you stand among your competitors. We perform competitive analysis to define who your competitors are in your geographic service territory, what competitive brands they sell, their marketing effectiveness and the potential to gain market share. Answering these questions for the buyer helps to remove risk in their head. Instead of wondering what the competition is like and then trying to reduce the buying price to hedge against perceived increased competition, define the reality. Take away the doubt and provide the buyer with a good foundation of data to make an educated decision on.

Solve business partnership issues

     Before you list the company for sale solve partnership issues. Review any partnership documents, explore your options and then, if possible, buy out your partner before you begin the sale process. Ensure every partner has been addressed and every partner has signed the necessary documents. This is important if there is not a majority owner in the business. Any issues must be worked out before the business is listed. If you have a buy/sale agreement in place with your partners, now might be a good time to get out and let your partners buy you out. Then start over with a business that is built to sell in 3-5 years. The last thing you want to do is attempt to take all the partners to the closing table with each one having a different opinion about how to sell the company, how much it should sell for, when to sell it, and who to sell it to. If you can solve all these decisions beforehand with legal binding agreement to sale, then you can try to take partners to the closing table. Generally, it does not go well.

Notifying your employees

     For most business owners your employees are like family. You want to treat them like family, and you hope they would treat you the same as well. Most of the time the inverse does not occur.  You need to realize there is a right way and a best way.  The right way may not be the best way. The morally right answer might be to tell them. But this almost always leads to catastrophe. Many deals to a buy a business will fall apart before they reach the closing table. Employees will get fidgety when you tell them you are selling. Some may jump ship. Stressed employees will almost always leak the news at the supply house or to other industry insiders. You will need your entire team and maybe even more to keep the ship afloat and hit you earn out numbers. You may even change your mind and decide not to sell the business. There are generally three different options for notifying employees that you are going to sell the business. 1.) Do not tell them. 2.) Tell them 3.) Only tell key employees.

     My advice is that you continue with day-to-day standard operations until you have a signed closing document. Then you can tell whoever you want. Here is the bottom line. If you can keep a secret, then keep it a secret. If you know you will probably let it slip along the way, then tell them and try to mitigate the risk. Ultimately there are pros and cons for each scenario. Most of the time a breach in confidentially occurs when the seller lets it slip and then the news spreads like wildfire.  The new buyer should have a key employee retention plan for the business when they buy it. This way when you jointly make the announcement together, the new buyer can announce to employee retention plan that pays X bonus if an employee stays on 24 months post-closing.

Maintain good financial records

     If you currently do not have a CPA, it is time to find one. You need to get your profit and loss sheets, balance sheets, tax returns and all your financial data in order. As a general rule the buyer will want to see your financial statements (profit and loss, balance sheet, etc.), tax returns, list of assets included in the sale, list of asset excluded from the sale, list of outstanding debt, all legal agreements (property leases, vehicle leases, tool leases, software leases), all contracts with (vendors, customers, employees), list of seller discretionary income (things you pay for out of the business for yourself), copy of any franchise agreements, articles of incorporation, patents, and etc. After a buyer signs a letter of intent to buy your business, they will then begin a due diligence process where they closely examine all these financial documents. These documents will also be used by your M&A advisor to determine a broker’s opinion of value for your business. The main thing is that all these documents are accurate and no appearance of or actual attempt of fraud is found. You would be much better to disclose all the skeletons in the closet before the process begins, rather than have them discovered during due diligence. If disclosed before due diligence it can most likely be addressed. If found during due diligence it is a deal killer almost every time. Keep in mind that over 45%of deals will fall apart during due diligence. Keep your records clean and your documents accurate, inclusive, and open.

List all the seller’s discretionary income

     Examples of these include any life insurance or health insurance paid for by the company for the owner. Personal automobiles paid for by the company, cell phone bills, gasoline, tires, auto repairs, home internet, meals for the owner, overpriced rent paid to the property if the business owner owns the real estate and leases it to the company.  Personal credit cards, personal auto insurance, clothing, travel expenses, you get the idea. Basically, anything the business pays for, that it would not have to pay for if it had a general manager needs to be added back into the numbers. Another example is if the company pays you a significant salary and pays your wife or your kids a salary when they don’t work for the business. if it would only take $75K to hire a salary and you pay yourself $175K then you need to add that $100K in revenue back into the financials.

Make sure any 401(K) or retirement match contributions are up to date

     If during due diligence it is discovered that your contributions are behind, the amount you are behind will be deducted from your seller’s payout at closing and the buyer will have questions of why the lapse occurred.

Maximize your companies’ sales and profits

     We mentioned in the Running Your Business to Sell chapter how you should choose a marketing company and how you should choose your marketing packages. This is also how you should prepare your business to sell. Buyers like to see that you have the customer acquisition problem solved. They would prefer that you state that it cost $175.78 cents on average to acquire a new customer through our marketing channels that to state that you do not spend money of advertising and you’re unsure of your customer acquisition cost. Marketing is a necessity in a growing business and potential owners want to know how they can grow the business. Not IF they can grow the business. You also want to reduce overhead to maximize your EBITDA. But this would be most effective if done 3-5 years before you list the business.

Review your pricing strategies

     How does your price compare to the competition? Does your price need to be adjusted up or down? Why would you not be priced in line with your competition? Is your quality subpar? Make sure your prices are in line with or higher than your competitors.

Clean up your customer list

     Clean up your customer data to ensure that your book of business is accurate and represents your actual customer list. If your book of business is 10 years out of date its almost useless as customer data changes every year (address changes, number changes, email changes). You should re-activate your data base using the technics described in the chapter Running Your Business to Sell. Then use email and text delivery messages to clean up the database and reactivate your list. It looks much better if your customer list is represented by an average purchase in the last 45 days than an average purchase of 8 years ago.

Clean up your inventory

     If you have boxes of antiquated thermostats in the warehouse or boxes of 6” elbows you bought for a commercial job 8 years ago, then organize the warehouse and clean up the inventory. You do not necessarily have to throw items of value away, but if you have unused items, move them to closed boxes that are clearly labeled to the top of your warehouse racks or above the office storage areas. The warehouse should be clean, organized, and neat to maximize efficiency and reduce waste. Most buyers would check to see if the inventory stated on the balance sheet is accurate. Make sure the inventory has an accurate value and in the case of old or antiquated inventory just zero out its value but keep the stock unless the warehouse needs the space.

Get on top of receivables

     Having large uncollected receivables could be an issue for a potential buyer. Any buyer will want to know that you have an effective and working account receivables solution. A potential buyer will also look at the accounts receivable days’ average. If you are having a problem collecting debt owed to the business you need to seek out help to solve this problem, but most importantly you need to disclose it the potential buyer. While most business sales are an asset transfer and not a stock sale, the burden of the accounts receivables is not an issue for the buyer. The buyer will not care if the account receivables are collected or written off. The buyer will be more interested in why you do not have a solution to a current accounts receivable problem.

Disclose All Payables

     You must keep in mind that the due diligence process is like an Easter egg hunt. The buyer or the buyer’s representative, most likely a CPA, is looking for Easter eggs hidden amongst the financials. In this case finding an egg is bad and not good. Sharing an accurate summary of your accounts payable and any issues you have before the Easter egg is found is the most important part of the process. If you try to hide a debt or a payable that negatively affects your EBITDA it can blow up the deal as soon as it is discovered.

Pay all your taxes

     (Consult a CPA) Remember that the EBITDA formulation provides a summary of income BEFORE taxes. So, any money paid in taxes is added back into the value equation. Any expenses you make to avoid taxes, like a helicopter for example will reduce the EBITDA formula and ultimately your value. Pay all your yearly and quarterly taxes before listing the business for sale.

Put a management solution in place

     Use cross functional work teams to put a management system in place. With cross functional work teams, responsibility becomes distributed among your staff. Issues or problems are only elevated to management when they meet a certain criterion that is defined. Otherwise, an issue is mitigated through a cross functional team where they consult each stake holder in the process and then make the best decision for the company, the customer and the profit. You can read more about cross functional work teams and how to build them in Les McKeown’s book “Predictable Success”. You can find the book on amazon.

Write process documents

     The documents include a mission statement, a vision, job descriptions, employee handbooks, process protocols, checklists, and quality control documentation. All these documents shift the management burden to processes rather than to people. With great processes, average people can manage with great success. Without processes it takes great people to produce marginal results.

Implement a continuous improvement process

     After you have your cross functional work teams and your written process documents, you need to put a continual improvement process in place. This process continually looks at how you do business, how your process work, how your people react to the processes and then looks for way to improve. A continuous improvement process produces improvement goals such as 90% correct job completion, or 0 work injuries, 100% checklist compliance. When the team hits the goal they get a reward, lunch out, bowling party, fishing trip, whatever the best motivator for your team is.

     I know this sounds overwhelming but take heed we implement these changes for HVAC owners routinely. Our advisory teams can work with your leadership to perform a needs gap analysis. This tells us where you are and where you need to be. We then execute 90-day sprints to tackle each need in a priority order. Therefore, the process takes 3-5 years. The transformation on your business is incredible. The increase in value of your business is incredible. And you learn how to do it on your own going forward to churn out high multiple generating businesses to sell.  The important thing to remember is that it takes time, but the payback is exponential. Next, we will live into how to determine what your business is worth right now.