Question 10: What are the most important factors in obtaining the best price for my business?

Answer: We have been asked this question many times by potential sellers. There are many factors that improve the value of a business and make the business sell for premium over what is obtained for the average business. Below are what I would consider the top 10 factors that affect the salability and price obtained when selling a business. It should be noted that it is very rare for a small business to have all of the following key factors. 1. Profitability/Cash Flow: Profitability should be in excess of a fair working wage for the owner. Maintain profit margins. The year or two prior to selling, make sure you run the business very lean. You want the business to be as profitable as possible. Do not incur any unnecessary operating expenses; keep capital improvements to a minimum; and reduce or eliminate owner perks. 2. Verifiable Books and Records: Three years of accurate financial records is a must. This is not only needed for Buyer due diligence, but will make your business bankable. 3. Positive Financial Trends: Growing sales and profits would be preferred. At a minimum you should have stable sales, profits and profit margins. 4. Diversified Customer Base: No one customer should represent more than 10-15% of the business revenue. If a substantial portion of your revenue is generated by one customer or a few customers, buyers will discount the value or require an earn-out to offset the risk associated with the potential of losing a large portion of the business and revenue associated with that larger customer. 5. Timing: Make the decision to sell while business has positive trend is paramount. Plan to sell the business when sales and profits are growing and business is good. Often Seller’s are motivated to sell when the going is rough. 6. Location and Lease: If the location is important to success, the buyer and financing institutions will want assurance that the business will be able to remain at the same location via a written lease. For a retailer, restaurant or service business that depends on pedestrian and/or auto traffic the location and lease terms is vital. Make sure that you’re in good terms with your landlord; that your lease is assignable or a new lease is available without a lot of interference from the landlord (read your assignment clause) and that you have lease rights or can obtain lease rights of up to 10 years at the time you are preparing to sell. 7. Curb Appeal: Just like a house, a business that looks clean, organized and well kept makes it more desirable. Good questions to ask yourself are what is the condition of my store, its fixtures, equipment? Is the merchandise clean and well displayed? Does the appearance of my store fit with the surrounding areas? 8. Transferability of the Goodwill, the Owner’s Role and Workforce: Goodwill value is the amount paid for the business that exceeds the fair market value of the tangible assets. Goodwill is the intangible assets of the business, which include things such as repeat patronage, trade name, brand recognition, work force, location, lease rights, reputation, etc. The more the owner is involved with generating the business revenue and dealing directly with customers, the more likely a buyer will have trouble maintaining those customer relationships after the owner is gone. Obviously, this results in a loss or revenue and profits for a buyer going forward. So, a business that does not depend on the owner as the major contributor in generating the business revenue, the more reliably the goodwill can be transferred intact to the buyer. Additionally, if you have seasoned management in place or quality tenured employees that will stay with the business after the sale, the more desirable the business becomes to buyers. The more appealing your employees are, the higher the price a buyer may be willing to pay. Make sure that your skills and customer/client base are readily transferable to a buyer. Reduce the business’ dependency on you by delegating responsibilities. Improve operational record keeping and procedures. 9. Condition of the Tangible Assets: Make sure your equipment and fixtures are in good working order; reduce or eliminate obsolete inventory; make sure accounts receivable and credit collection policies are solid. 10. Terms of Sale: Terms of sale for a small business can have a significant impact on the final price. Businesses that offer seller financing with 30% to 50% cash down, with a reasonable interest rate and repayment terms (36 to 60 months) often obtain a price of 10% to 20% more than one that requires all cash. Additionally, seller financing increases the number of buyers that can qualify for the purchase.