Business Sales and Valuation

The American dream is to own a business, draw an income while building equity, then sell your business to retire. This cycle has been going on for many decades. Business savvy individuals have written many books and articles on ways to succeed. The purpose of this short article is to summarize critical necessary steps for the business owners who may be thinking of selling their business within the next five years and the entrepreneurs who may be thinking of buying a business.

Because I have worked with many business sellers and buyers, I have developed an understanding of the psychology of business transactions. The most effective way to understand how to prepare your business for an exit – selling your business – is to understand the buyers’ perspective.

Every business owner’s focus must be on maximizing the cash flow of the business. That is why you own a business. The cash flow is one of the significant factors from the buyers’ perspective. Profitability and revenue are two key factors in determining a business valuation. When a business is profitable, an owner is receiving a reasonable income to pay for the living expenses and may have disposable income to expand the business. Growing the company, in turn, will increase the revenue, the net cash flow, and ultimately the equity in the business.

There are many steps that a business owner must take to manage and improve both the revenue and the net income – managing expenses, asset turnover, and leveraging are a few key actions. A fundamental enabler to achieve these objectives is to have a clean set of financial books.

Another major endeavor for a business owner is to ensure that the business processes are turn-key. A turn-key solution implies having processes in place that are well documented. Remember that you, as the business owner, may have all the procedures in your head. However, a buyer will not want to rely on tribal knowledge. A buyer wants to see a cooking recipe approach. A buyer will want to follow the seller’s footsteps within the first 6 to 12 months post-transition to ensure continuity of the SAME revenue and cash flow. Therefore, document your business processes and keep them updated.

Remember that if you are the business, then you will be selling yourself and not the business. I have been in many situations like this, and selling a business becomes highly challenging. Of course, there are provisions to apply to make the sale happen. However, most sellers do not want to accept them because their purpose in selling the business is to get the cash and to retire. A remedy for this shortcoming is to hire a team with preferably a management team in place. In this way, you are no longer the business. You will be selling the goodwill, the cash flow, and the team that helps you generate the revenue. Usually, a good rule of thumb that I always ask the sellers is if they take any long vacations (usually two weeks plus) and are worried about the business revenue continuity.

Please hire and work with a trusted advisor to guide you in preparing and selling your business. Remember that you will want to retire only once.

Matt Manavi, MBA, CBB, CBI

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