Ten Steps to Build a Saleable Business

Ten Steps to Build a Saleable Business

Now that you’ve built a successful company, you may wonder what will happen next. If a sale is in the cards, it’s important to be prepared. In this guide, we’ll list ten steps to build a saleable business.

Get Everything in Order

If you’re already making a profit from your business, it’s easy to assume that the hard work is over. However, there’s always room for improvement, especially when you’re getting ready to sell. What will investors and buyers find when they get into the company’s finances? A thorough review of crucial assets, contracts, and processes will save hassle during negotiations and increase the company’s value.

Keep Disparate Businesses Separate

Sometimes evaluating multiple businesses in a single entity distorts the underlying companies’ value and marketability to potential buyers. While owners typically think of their companies as integrated entities with various divisions, some buyers may be interested in individual aspects of the enterprise, especially if the businesses really should be separate entities. When assets and financials are clearly separated, it’s easier for a buyer to get a clear picture of the company’s value.

Assemble a Team and Put Together a Plan

As a cost-cutting measure, some business owners avoid seeking outside help. Experience dictates, however, that owners enjoy more peace of mind and higher proceeds by bringing in advisors. While almost every business owner thinks they are a skilled negotiator, some ‘professional’ buyers, such as private equity firms, have done this hundreds of times and will be in a clear position of advantage.  By recognizing their limitations, smart sellers will be in a better position to take advantage of the benefits skilled advisors can provide.

Once you’ve built a team, be sure there’s a plan in place before engaging buyers. Getting too far ahead of the game may bring delays, missteps, and a not-so-favorable outcome. Let the team do their job—while it can be hard for an owner to let go, doing so will bring the highest sale price.

See Things From the Buyer’s Perspective

When selling a business, it’s common to fixate on the sale price and forget about everything else. The terms of the sale are just as important.  That seems counterintuitive, but more often than not, it causes sellers to leave a lot of money on the table. It’s more important to think about potential buyers and their reasons to purchase your business. Determining how buyers intend to leverage your company as an asset will help you negotiate more effectively and command a higher sale price.

Know Your Vulnerabilities

All businesses have weak spots, which tend to evade the notice of all but the most steadfast owners. Allowing advisors—and yourself—to make a realistic assessment will put the team in a better position for a hassle-free sale. Along with known operational weaknesses, be sure to look for those that are less obvious. If it’s not possible to eliminate a problem before the sale, acknowledging it and disclosing it to the buyer will allow you to control the message and protect your interests.

Create a Letter of Intent

Once a buyer is found, the next step is to create a comprehensive letter of intent or LOI. Many sellers assume that an LOI only needs to cover the deal in the broadest sense, but that’s not the case. When a letter of intent isn’t sufficiently detailed, buyers may attempt to erode the deal. By ensuring that all important provisions are in the letter of intent, you’ll have more leverage when it’s time to negotiate.

Keep the Team Focused on the Company—Not the Sale

We’ve all heard about buyers who asked for last-minute concessions because the company’s recent financial results did not meet their expectations. Often, the main cause of weak results is that the company’s management team was focused exclusively on the sale.

It’s an expensive mistake, but it can be avoided by creating a strategy plan that outlines who’s managing the deal and who’s overseeing the business.

Assess Your Tax Exposure

While most business owners file their federal returns and make tax payments on time, many still have tax exposure. Collection attempts by international, federal, state, and local governments, all of which are feeling the sting of a stagnant economy, are at their highest levels in decades, while technological advances have given small- and medium-size businesses additional access to the wider market.

A buyer’s due diligence team may discover your company’s tax exposure, stalling negotiations and putting the entire sale at risk. Contracts typically contain clauses requiring the seller to verify that they’re in compliance with their jurisdiction’s tax laws. If the sale is a stock sale, and the company is audited after the sale and a material assessment occurs, the buyer may hold the seller responsible. This may lead to a large assessment and significant out-of-pocket costs, not to mention litigation between the two parties.

Decide What You’ll Do After the Sale

Your business is likely your most important asset. Have you thought of how you’ll invest the sale’s proceeds so there will be enough funds for estate planning and other long-range financial goals? A post-sale plan should consider:

  • How the sale’s proceeds should be used to replace operational income.
  • Whether you’ll take an earn-out period, seller financing, or cash at closing.
  • Which type of deal you’ll take—will it be a promissory note, stock, or cash?
  • If the deal’s tax liability will be deferred or paid immediately.

Lastly, you’ll need to decide how those tax liabilities will be funded. If you’re holding options, those stocks’ value may be taxed at ordinary income rates, if you have not held them for more than a year.

Will You Stay or Go?

Your sales plan should consider the extent to which you’ll relinquish control of the business, whether you’ll accept options, if you’ll stay on the executive board, and how these factors will affect participation in a potential earn-out plan. These are just a few things to consider before finalizing a deal. If you’re planning to stay at the helm and retain some opportunities after the deal, be sure everything is in writing and that any agreements are reviewed by legal counsel.  If the sale is a smaller sale, the seller may be limited as to how long they can stay on, post-close, by SBA rules. This is an important consideration in the ten steps to build a saleable business.

Plan for a Successful Sale

Whether your company is old or new, it’s important to run it as if you’re planning to sell. You’ll conserve resources, make more money, work with clients more effectively, and eliminate stress. Selling a business is an arduous task, but the rewards for careful and early planning are worthwhile. Follow these ten steps to build a saleable business.

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