Are You Prepared To Sell Your Business?

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By Robert Duplicki Updated November 25, 2023

Perhaps you have no plans to sell your business. Or maybe you are getting closer and closer to that point. Consider that the experts suggest you start preparing far ahead. How far? Start planning to sell your business two or preferably three years in advance.

Why start so far ahead of time? Here are some reasons why:

To maximize the price you receive for your business
So that you have enough time to run your business while selling your business
In order to learn all that you need to understand, to manage the process effectively
To complete a seller's due diligence audit
To improve your margins
To learn about seller financing
In order to build your team of advisors
To improve issues discovered in your seller's due diligence audit such as a high customer concentration
To prepare for problems that will arise in selling your business
To prepare for life after you sell your business

What Is a Seller’s Due Diligence Audit?

"For the seller of a business, a due diligence audit is a complete and immersive review of your company’s financial, legal, and operational landscape. It involves close scrutiny of every aspect of the company, from profits and losses to contracts and leases to inventory and sales to accounts receivable to customer relationships, and more. Given the multifaceted scope of a due diligence audit, most sellers get help from professionals who can conduct their evaluations with an expert and objective eye. A good team will include an experienced business attorney, business broker or investment banker, and CPA, among others."

Just reading this one paragraph is eye-opening. It's taken from the article "Before You Sell Your Business: The Due Diligence Audit" by JD Supra.

This is a good summary of the task at hand. As the business owner, you or your staff can begin this process informally and create a timeline for the work that lies ahead. At the same time you can approach this process as if you are a potential buyer. How excited would that buyer be right now about your business? What can you do to enhance the buyer's motivation? What concerns would a buyer have now, that you can alleviate before putting your business up for sale?

To see things more from the buyer's perspective, here is a concise article from Nolo titled "Due Diligence: What to Investigate Before You Buy a Business." This article gives you the opportunity to be prepared for the advice given to business buyers.

How Will You Maximize The Price You Receive For Your Business?

Whether you are selling your business or not, maximizing profits is an important goal. And maximizing profits will help you maximize the price you receive for your business. On that topic, here is an excellent article from The Kickass Entrepreneur titled 3 Powerful Ways to Make Your Small Business More Profitable and Maximize Profits.

Data source: McKinsey&Co. (Note that in the title of this section "price" refers to the price you get for selling your business. But in the graph "price" refers to the price you charge for products or services.)

Improve Customer Concentration Before Selling Your Business

Accrding to data management company Klipfolio, "Customer Concentration, or Customer Revenue Concentration, refers to the amount of your total revenue that is generated by either your highest paying client, or a set of your top paying clients. The rule of thumb, especially for more mature businesses, is that no more than 10% of your revenue should be coming from one customer. Similarly, no more than 25% of your total revenue should be dependent on your top 5 customers."

Completing the seller's due diligence audit may give you additional motivation to improve on this issue, as customer concentration affects the value of your business. While estimates of a high customer concentration will vary, be prepared that a potential buyer of your business will perceive it as having high customer concentration.

Here is a viewpoint from Piedmont M&A Advisors: "A concentrated customer base increases the risk for the owners, everyone who depends on the existence of the business, and for potential purchasers, who value businesses commensurate with the risk involved in their cash flows. For a potential purchaser to invest in a business with a concentrated customer base, their rate of return will need to be higher, which translates to a lower value purchase price."

On the other hand there are benefits to developing strong relationships with a small number of large customers over a period of years. This process can be enhanced by signing long-term contracts, and by developing products and services to meet the changing needs of your key customers. The value of these relationships should be stressed when negotiating the sale of your business.

Here are some additional ideas to deal with high customer/client concentration:

Your largest customer/client may have an influence over how you run your business, steer your future plans and have leverage in negotiating prices. Give all you can to meet their needs, while being proactive to anticipate their expectations, so you can maintain control of the relationship. Use this opportunity for strong referrals which could lead to a lower custiomer concentration.
Look for ways to broaden your customer base outside your geographic area and through ongoing product development. Make it a practice to explore ways to increase the services you offer. By doing so you may improve your success in expanding your geographic area. Will your additional products and services allow you to market to new industries?
It may be more helpful to reduce the services you offer. Is there data available that demonstrates how your competition has comparable market share, yet offers less services? Do you know the marginal return for the additional services included at a certain price point? Is this an opportunity to raise prices as suggested above? Or do you have staff who could spend less time servicing accounts and more on new customer acquisition?
Consider increasing your budget for sales and marketing training. Check out the book "Sell Or Be Sold" by Grant Cardone. Through his website you can get his books for free, by just paying for shipping. Sales training is available through CardoneUniversity.com.

How To Sell A Business Checklist

This section is more of a discussion of a "sell your business checklist", with links to some examples. If you do an online search, you will find plenty of information on this topic. Selling a business is typically a large underttaking, so a short checklist of how to do it isn't the answer. You might review one source that looks good, but question who wrote it. They could be a good writer, but may lack the credentials you expect. Another source might have the background you want. Then you compare the two articles and find that they are virtually the same. So who is the original source of the information? And which source is best for you?

I think it's best to start by reviewing a few different sources including those linked to above. Going further, Fulton Bank founded in 1882, provides a four page PDF titled Selling Your Business Checklist. The explanations they offer for each item will give you a good way to think about the process of selling your business. Mission Peak Brokers with over $400,000,000 sold, provides "Small Business Sale Checklist: 20 Essential Keys For A Successful Sale." This checklist should give you a complete picture of the work at hand. Of course what is really a complete checklist for you will develop throughout this process, and by working with your professional advisors.

One concensus bit of advice is to start preparing to sell you business far ahead of time. So learn as much as you need to about selling your business, produce a game plan, and just get started.

Seller Financing

A high percentage of small businesses are sold using seller financing. One reason is the difficulty buyers of small businesses have in obtaining bank financing. Another reason is actually a group of reasons that seller financing is beneficial to business sellers. So learning about seller financing is another item on your checklist to sell your business. Where you are in your timeline should help you prioritize this task.

To put seller financing into perspective, Morgan & Westfield, a leading M&A firm, states that based on statistics from over 10,000 business sales, less than 10% are sold for all cash. Here is a helpful guide titled M&A Seller Financing: A Complete Guide, from Morgan & Westfield.

Seller financing, also known as owner financing, means that the seller will take payments from the buyer to pay for the purchase of an asset over a period of time. This process is used in the sale of residential and commercial real estate, businesses and other assets.

For tax purposess seller financing is referred to as an Installment Sale. This allows you to pay taxes on your profit as you receive it, which is spread out over time. Additional benefits of seller financing for the business seller include an increased pool of buyerrs, faster closing, greater control over the sales process and a promissory note which can be sold.

Part of the documentation used in seller financing is a secured promissory note carried by the seller. When used in the sale of a business, the promissory note is known as a business note. The business note is an asset that can be sold for cash. So after the business is sold, and usually after a few payments have been made on the business note, the note can be sold. The entire note can be sold or partial sales can be structured in various ways depending on your needs. This process can take place more than once during the term of the note. As a note broker I will help you sell your note in a way that best meets your needs.

While you may sell one or two businesses, business note buyers develop experitise by evaluating many business notes over time. So there are a few benefits for a business seller to learn about note buying criteria. First it will help you evaluate potential purchasers of your business. Second, it will help you properly structure a business note, and financing is obviously a key part of selling a business. Finally, it will help you create a business note that is likely to sell for a higher price. Take a look at the recommeded reading below to learn more.

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