It seems that I get more and more calls from business owners who start the conversation with something along the lines of,
“Hi Rich, my advisor recommended I give you a call. I’m thinking about selling my business and wanted to get a sense of what
it’s worth.”

It’s an interesting conversation because most business owners have a pretty good sense of what is going on in their market.
They know their competitors, understand their customers and generally have a reasonable idea of what their business might
be worth. What they really want to know is what we think it is worth.

The first thing that I try to determine is what exactly they are looking for. Are they interested in understanding the enterprise
value of the entire business because they are considering a sale? Or are they looking for a valuation of a fractional ownership
interest because they are doing estate planning or considering transfer of ownership?

Once we establish that the goal is to understand the enterprise value of the company, we can begin the valuation process.
And, once we complete our analysis, I can almost guarantee that the next question will be:

“Rich, based on what you see, what could I do to increase the value of my company?”

Now, I’m not an M&A investment banker, and I don’t pretend to have a magic formula that will suddenly double the value
of a business. But after looking at a lot of companies over the years, I do think that there are several things an owner should
consider if selling their business may be somewhere on the horizon.

And perhaps the most important advice is this: don’t wait until you are ready to sell to start preparing to sell.

Getting a business ready for a transaction can take time, sometimes a year or two. The earlier that you begin, the more
opportunity you have to address issues that could otherwise become distractions, or worse, negotiating points, when a
buyer comes along.

Start With the Financials

The first place to begin is with the company’s financial records. Make sure three to five years of financial statements are in good order, organized and readily accessible.

This may sound obvious, but you would be surprised how often the financial history of a business requires some explanation.

Take a close look at the balance sheet and income statement. Are personal expenses being run through the company? Are there unusual expenses that a buyer is going to question? Are there assets or liabilities sitting on the balance sheet that no longer have a real business purpose? These items may be perfectly explainable, but a prospective buyer is going to look closely at the numbers. The cleaner and more understandable the financials are, the easier it is for a buyer to understand the business—and, importantly, to have confidence in what they are seeing.

The next question a buyer is likely to ask is, “What happens to the business if the owner isn’t here?”

Build a Business That Doesn’t Depend Entirely on You

For example, everyone knew Warren Buffett was the secret sauce at Berkshire Hathaway. What investors also knew was that Buffett had spent years making sure the recipe didn’t disappear when he did. He planned for succession well in advance, and when the baton was eventually passed, investors didn’t run for the exits, which may be the best evidence of all that he had done his job.

If your answer is, “I’m not really sure,” you have some work to do. Many successful businesses are built around an owner who knows everything, knows everyone and seems to be involved in every decision. That’s terrific when you own the company. It can be considerably less attractive when someone else is thinking about buying it.

A buyer wants to know that the business can continue to operate successfully after the owner leaves. Developing a strong management team and capable employees can therefore be one of the most important things that an owner can do. And this is not something you can fix a month before a sale. It takes time to delegate responsibilities, develop people and demonstrate that the company can perform without the owner being involved in every decision.

In other words, if you want a buyer to believe the business can run without you, you should probably give the business some practice doing exactly that.

Know Your Customers

Another area worth examining is the customer base.

If a significant portion of your revenue comes from just a handful of customers, a potential buyer is going to notice. Customer concentration isn’t necessarily a deal breaker, but you should be prepared to explain it.

How long have you had those customers? How strong are the relationships? Are there contracts in place? How dependent are those customers on the business? And what are you doing to diversify the customer base?

A buyer doesn’t necessarily expect a business to be perfect. What they want to see is how stable your customer base is to a potential change in ownership.

Take a Hard Look at Costs and Working Capital

Finally, take a fresh look at the way the business operates.

Are there non-essential employees or expenses that have accumulated over the years? Are there costs that could be reduced without affecting the business? Is working capital being managed appropriately? Are you carrying assets that aren’t really necessary to the operation?

This isn’t about artificially making the company look more profitable before a sale. Buyers and their advisors are pretty good at seeing through that.

It is about making sure the business is operating efficiently and that the financial results accurately reflect the business a buyer will actually acquire.

Think Like a Buyer Before You Become a Seller

Selling a business is rarely an overnight decision. In many cases, an owner may first begin thinking about a sale several years before actually putting the business on the market.

That can be an advantage.

If you think selling may eventually be in your future, start preparing now. Clean up the financials. Build a strong management team. Reduce the company’s dependence on you. Understand your customer concentration. Review your costs and working capital. And, perhaps most importantly, take a step back and look at the business through the eyes of a potential buyer.

You may ultimately decide not to sell. That’s perfectly fine. In fact, you’ll probably end up with a better-run company as a result of the exercise.

But if the day comes when you decide to sell, you’ll be in a much better position to answer the question every prospectivebuyer will eventually ask:

“Why is this business worth what you’re asking me to pay for it?”

The best time to have a good answer isn’t when the buyer is sitting across the table.

It’s years before they arrive.

About Empire Valuation Consultants

Empire Valuation Consultants has grown into one of the nation’s leading and most respected independent valuation consulting firms, preparing 45,000 valuations and assurance engagements over our 38-year history. Our wealth of valuation experience includes nearly every industry and type of investment (equity, debt, real estate-backed assets, intellectual property and intangible assets), offering clients well-balanced valuations that are specifically tailored to each situation. The success of our refined valuation process is reflected in the firm’s reputation in the marketplace. Time and again, asset managers, accountants, attorneys and bankers turn to us for timely, defendable, and comprehensible valuation work.