At Prometis Partners we always advise our clients to begin preparing for the sale of their businesses well in advance of when they want or need to put them on the market. The additional time will allow them to evaluate and fix any weaknesses their companies have so they will be as attractive to prospective buyers as possible and will generate good offers. How long this preparation process will take varies from company to company, of course. Most of our clients do understand this, but what they’d really like to know is: How do you know if your business is ready for sale?
The question is straightforward. Unfortunately, we can’t give as direct an answer. Again, there are many factors to consider. If, as an owner, you do not fully prepare for the eventual sale of your company, you will find that selling your business is a more difficult and chaotic process than you expected. It may come with unforeseen complications for you, your family, and your employees. It may mean your company will not sell at all. Often it’s simpler to tell when a company is not ready for sale. Here are some signs that more work needs to be done:
The company is owner dependent. If the company cannot survive without the owner being present and active in its day-to-day running, it’s not ready for sale.
The company has weak or undeveloped structures and procedures in place. In very owner dependent businesses, there are no policies or procedures for how the business should be run – they’re all in the owner’s head. But there’s a range of readiness between that kind of situation and a company that is rich in structural capital. The goal is to have all the company’s policies and procedures written down in detail and have the company’s employees fully trained in how to follow them and how to train others to follow them as well.
Both of these weaknesses will be obvious to buyers and will repel them. No one wants to invest in a company only one person can run – especially when that person has plans to leave!
Inadequate Professional Input and Support
There is no team in place. Owners know how to run their companies because they have experience. They rarely know how to sell their companies because that requires different knowledge and skills. Have you hired a CPA, a business broker or exit planner, or met with an investment banker? Have you engaged a lawyer with experience in business sales, and mergers and acquisitions? If you do not have experts to consult and help you make connections, you are not yet ready to sell your business.
Your financial documents are not in order. You need to have all of your finances professionally evaluated by a CPA to make sure they are clean and there are no unpaid debts, including liens and unpaid taxes. You also need to understand what the sale will mean for you in terms of both payments and tax ramifications.
Due diligence has not been performed. What is due diligence? It’s “the process by which business owners conduct a business, legal, and financial investigation of a company in preparation for a possible sale transaction.” Both sellers and buyers will do their due diligence, but sellers have to do it before they put their business up for sale to ensure that a sale is even possible.
It will take time to put together a team of professionals whose experience and judgment you trust with what is likely your greatest financial asset. Don’t rush this. Find a great team and rely on them to do their jobs and get your company ready for sale.
A management succession plan is not in place. This relates to owner dependence above, but it’s also about ensuring that your employees will not have to suffer a chaotic ownership transition or lose their jobs because you have decided to sell. Most owners do care about what happens to their employees after a sale. In a 2017 Market Pulse report, 70% of owners reported that employee welfare was a top concern.
The best thing to do is to have a management system in place and functioning well at the time of the sale. If the company is both profitable and well managed, a new owner will have little need to lay off workers or make large and disruptive changes after the sale. Buyers do not want to clean house in the companies they acquire. They want to get a good return on their investment without having to micromanage their new employees.
How Ready Is Your Company?
If your company is weak in any of these three areas – owner dependence, inadequate professional support, and management – it is not ready for sale. Any of the above issues are red flags that you should not ignore.
The unfortunate truth is that most companies are not ready for sale when their owners decide to sell, and their weaknesses do complicate or even stymie a sale. That’s why exit and transition planners exist: to coach business owners on how to get ready for this big step. It is vital that they do and sooner rather than later.
If you would like to discuss how begin determining how ready your company is for sale, we encourage you to take our ExitMap Assessment. This questionnaire takes just 15 minutes to complete, consists of only 22 questions, and produces a full color 12-page summary report that will be emailed to you and Prometis Partners. For more information or to answer any questions you may have, contact Vincent at (616) 622-3070 or by email at email@example.com for your initial consultation.