4 Ways To Help Improve Your Client's Valuation And Speed Up The Sale Process
Updated: Dec 19, 2022
"He didn’t want to take the time to do the work to remove himself before he went to market. He did eventually sell the business but it was at a reduced valuation..."
When selling your residence these days, it is very common to stage your home in order to present it at its very best to potential buyers. This process applies equally well when you are thinking about selling a business. Making sure your client’s business is presented and marketed in the most positive manner possible is critical. A proactive approach now gives the owner the best the opportunity to address some of the essential aspects of a successful sale.
As a coach, you cross paths with many different types of business owners. They all got into business for different reasons, but one thing usually comes across right away and that is the pride they have for what they have built, their “baby.”
This is the point where your well-honed tactfulness and skills as a successful coach come in handy. You know that not all of these businesses are perfect, so, we need to be very diplomatic and careful not to call anyone’s “baby” ugly! The fact is, we all wear rose coloured glasses at times and may have an unrealistic view of things. This is an opportunity to start the conversation with the business owner about what’s important to consider as they progress into the planning stages of selling their business.
There are many books dedicated to the subject of selling a business, but that is beyond my scope here. However, there are several areas that you can focus on with the business owner that will prove beneficial in maximizing the business valuation, minimizing the time on the market, and actually getting the business sold as a going concern in a share sale rather than liquidating the assets. Your overall goal in the process is to get the business owner to look at their business with a birds-eye view and objectively examine it, and get them to realize they are not their business; the business needs to be viewed as a distinct entity.
When talking to owners about the exit of their business. Focus on these 4 things to help improve the valuation and speed the sale process.
1) Remove any dependency on the owner
This is a critical aspect to address from the very beginning. As a business coach you have likely observed this owner dependency situation first hand, and in many circumstances it seems to work. But if they want to sell the business it has to be able to function effectively without the owner in the picture. If not, the business owner may be looking at a long earnout as the new owner comes in and needs to learn everything that’s in the current owners head.
I recently observed this situation with a business owner in the food-service sector. He had a very viable distribution business with over $2.0 M in annual revenues. The problem was that Mike (name changed) was the business and he didn’t want to take the time to do the work to remove himself before he went to market. He did eventually sell the business but it was at a reduced valuation and structured with a two year earnout. During that time he had to work full time in the business. He found this very stressful and personally draining. The fact is, this could have been avoided if he had heeded the advice and taken steps to correct the owner dependency issue.
The key element in this process is to ensure that there is adequate structure and an able team that can take over the responsibility for all of the owner’s duties. The management structure can vary, such as hiring a G.M. or Ops manager depending on the type and scale of business, but with sufficient support to ensure their ongoing success. The ultimate litmus test is the three month vacation. Can the business run properly when the owner is removed for a period of three months? If not, perhaps there is more work to do to get ready for their eventual exit.
2) Systemize everything – The critical importance of SOP’s
Well documented systems are the reason that the franchise model is so successful. Without them it’s all just a matter of chance as to whether things go as planned. In his bestselling book Traction, Gino Wickman asks the business owner this:
"Do you have a grip on your business or does your business have a grip on you?"
He goes on in depth about the importance of having and creating robust systems to effectively manage the business.
By documenting all of your core businesses processes and creating standard operating procedures (SOP's), the owner wins on a number of fronts. The business becomes less dependent on the owner, reducing their stress and providing more time. Additionally, it provides the opportunity for further employee engagement leading to more successful, happy, and dedicated teams. This process will also help create a unified culture and provide absolute clarity on who does what and how. This is exactly what the new owner will need to successfully carry on the business after the owners exit.
This process doesn’t need to be overly complicated and, best of all, the owner doesn’t need to be fully involved. In fact, it’s likely better if they aren’t too involved at all. Let the people who are actually doing the work be the ones to capture the processes. You can have one person coordinate the process and capture the individual process in documents, screen share progressions, or videos; whatever format that will make them easily accessible and user-friendly to train and onboard employees or cross train people from other departments.
3) The proof is in the numbers!
Having properly documented and audited accounting statements is a best practice. A stack of miscellaneous receipts and cash sales documented with a free online bookkeeping app is not an adequate level of documentation. A typical “Notice to Reader” format prepared by a certified third party is a minimum. Yes, it will cost more initially to have audited financials but it also provides added benefits. Many owners forgo this step and lose valuation because of it.
Audited financials provide the potential acquirer more confidence in what they are buying. Providing for this step can also speed the process of getting financing cleared with the buyer’s banks or investors. We all know that the goal at year end with most owners is to reduce their tax liability and that’s fine. However there are those expenses that are sometimes included that wouldn’t cut it in the corporate world. It’s best if these are avoided completely but, at a minimum, make sure these are at least identified as a separate expensed line item. This will make it easier to create and verify an adjusted EBITDA or SDE number (Earnings Before Interest, Tax, Depreciation, and Amortization; and Sellers Discretionary Earnings, respectively). The goal is to remove any doubt from the acquirer’s mind that the numbers are completely accurate.
4) Highlight the exit story to showcase the buyers opportunity
One question your client will be asked by an acquirer is why they want to sell the business. This can be tricky to answer correctly. This is where you can help them immensely. Don’t just let the owner tell potential buyers that they want to retire. This may well be the case but make sure the acquirer knows that the owner is proud of what they have accomplished and that the business is built to last and has lots of continued growth potential.
Advise your client to start looking at their business like a potential buyer. Start to identify possible acquirers. Are there competitors that might be interested in an acquisition? How should you be positioning the business to look attractive to these targets? One thing is clear from the M&A market valuations is that a strategic acquisition typically fetches a much higher valuation than an asset sale.
Let’s assume that a new owner will be trying to grow the business after the current owner is gone. You and the current owner should think about painting the picture of the upside potential early on in the process. Identify the Total Addressable Market (TAM) for the products & services and don’t be shy about telling the business story in a positive light. Be aware of any market trends and new market opportunities that will benefit the business in the years ahead. You will want to be able to back these statements up with tangible examples and evidence. A good exit story can help you and your clients get to the number you have targeted.
Much needs to be accomplished to guarantee the most positive outcome for the exit of your client from their business. That is why it is necessary to start long before the actual business sale to ensure that this transition remains a choice. It certainly would be nice to make a clean, crisp break from the business after an all-out sprint, but this is rare. The vast majority of business owners find the process of selling a company is a squishy, multi-year slog.
The sooner you help them start the process the better!
Andrew Allen, BBA, SCMP, CPBC
Andrew is passionate about helping entrepreneurial business owners get what they want from their business – profitable growth, effective and accountable people, and more control over their time. His goal is to work with you to ensure you get what you want from your business and personal life, the freedom to do what you want when you want.
Andrew's business experience encompasses a history of success in turnaround situations, acquisition integrations, restructuring and business improvement in various verticals in the B2B and B2C sectors. Throughout his 30 year career, he has built and run small to mid-sized enterprises as well as national organizations ranging in revenue from $5.0 M to over $250.0 M.
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