If you’ve decided that it’s time to sell a business, you may already realize that there is much to do to make sure it is sellable before you do so. Some of these things you may have already thought of yet, but you might not have realized some of the other items on this list.
Before you dive into making sure a business is sellable before you sell it, you might want to check out our guide on selling a business here.
Before you sell a business: determine if it is sellable
If you’re still thinking about whether to sell a business, you may not have even determined if it is sellable yet. Some businesses simply aren’t, so it’s important to be realistic with yourself from the very beginning. The number one reason a business might not be sellable is if you are the brand.
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This might seem obvious, but what’s less obvious is that you might be able to make the business sellable by making a shift. It will take some time to do, but in certain cases, it can be done. For example, if you’re selling a product using yourself as the trusted spokesperson, you will have to start emphasizing the brand of the product over your personal brand as a trusted spokesperson.
If you’re running a service business, you should bring in a team of people and start building the company brand instead of a brand that’s built around your name. For some service businesses, this may not be possible because customers may choose to look elsewhere if you step away from the company. It depends on what kind of service business it is.
Reorganize and restructure before you sell a business
After you have determined whether a business is sellable, it’s time to get down into the details of selling it. You may have to restructure the business in order to make it sellable. This is especially true if you have organized it as a single-member LLC, which means you report the business’ income on your personal taxes.
Some sole proprietorships don’t necessarily require any formal paperwork like articles of incorporation, so you may need to officially create the business on paper so there is something to sell. You should seek the advice of an attorney to determine what business structure would be most beneficial since you are trying to sell the business.
In addition to formation paperwork, you will need to have financial documentation in place, and this is one reason why you can’t sell the business as an entity that reports its taxes on your personal tax return. You will need to share the business’ tax returns and financial statements with potential buyers.
Additionally, some sole proprietors don’t keep a lot of financial statements because they don’t feel they are necessary. However, these statements are a necessary part of determining what the business is worth.
Separate finances and bank accounts
If you haven’t been keeping good financial records, you may have to wait a few years before you can sell the business. Most buyers will want to see at least three years of financial statements so they can determine the growth rate of the business, which will factor into its value. In the case of a business that had a sudden jump in revenue or profits, they will want to be able to determine whether that jump is sustainable or if it was just a one-time thing.
Many sole proprietors and owners of single-member LLCs also use their own personal bank accounts for the business instead of holding a business account. Just as you separate the business from you legally through formation papers, you must also separate the money.
The amount of money that’s in the business account will affect the value of the business because it goes along as part of the assets. You must also have separate credit cards for the business. Any balance that’s on the business credit card will also affect the value because it will be a liability. The same holds true of any lines of credit you may have.
If you haven’t distinguished between yourself and the business when it comes to debt, you will have to figure out how to have the business pay you back for the debt you took out on it. If the business can’t pay you back, you will need to make other changes to get that debt switched to the business if it is possible to do so.
Many business owners use their personal social media accounts to promote their business, but you will also need to create separate business accounts for the company before you sell it. You probably have a lot of contacts who only follow you for news about your business.
Thus, to transfer them to the business social media accounts, you should post links to the new accounts and advise customers to follow them instead. This will enable you to build a following for the business so that it has a solid social media presence before you sell the business.
You should also make sure to switch every other online account associated with the business over to business email addresses. It’s best to use a general company email instead of tying it to your own business email account.
Size matters when you sell a business
If you have already done everything above to make a business sellable before you sell, that doesn’t necessarily mean you are ready to list it. There are some things you can do to make a business even more sellable before you sell and increase its value to potential buyers.
The first has to do with financial performance. We’ve already discussed financial statements, but there are some things you can do to increase the value of the business beyond simply having statements available for review. Revenue and profits are the two metrics buyers will look at when they decide whether they want to buy a business.
Some business owners find they will get more for their business if they wait until after they have an especially good year for sales and profits. Smaller companies are often discounted because the risk is higher since they do not have as many customers as larger companies.
Another red flag is if one customer makes up more than 15% of your sales. That’s a risk for a buyer because if that customer leaves after the business is sold, they will be taking a large chunk of the company’s sales with them. You should get more customers before you try to sell because having just a handful of large customers is a major risk when the business is sold, and risks are typically discounted from the sale price.
Making a business sellable: sell a business with growth
Potential buyers also look for companies that are scalable, so it’s best to be able to show a pattern of growth when you make a business sellable and move forward to sell it. Just as growth companies earn a high stock price, so a business that is growing steadily will earn a higher sale price.
Cash flow is also a significant factor when it comes to making a business sellable before you sell it. Companies that can fund their own growth internally will be worth more than those with cash flow problems. Potential buyers don’t want to have to pour more of their own money into the business to be able to grow it.
One other thing to think about is recurring revenue. If you haven’t already developed any recurring revenue streams, you should start thinking about ways to do that. Recurring revenue streams are good for growth because they are good for retention. It’s easier to grow if you aren’t having to constantly replace customers who leave.
Determining whether a business is sellable and figuring out how to make it sellable are important steps when it comes to selling a business. You should work with a broker to make sure that you have everything you need to get as much money as possible for your business. A good broker will help you work on the things you need to work on to make your business sellable.