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Exit strategy: preparing your business for sale

Interview with...

Andrew Rogerson, owner and MD of Sacramento Murphy Business and Financial Corporation office
Topics covered:
Exit strategy: preparing your business for sale, maximising its value, deciding when to sell
Owned five businesses, selling first at x 2.5 original purchase price. Chair of Sacramento Chapter, California Association of Business Brokers, highest business broker accreditation in California
business valuations, transaction analysis, consulting for sellers and buyers & for aspirant franchisees,   machinery and equipment appraisals, range of sectors, US and international business
Sacramento, California
andrewrogerson2 How far in advance of their intended exit should a business owner begin planning the sale of their business?

Andrew Rogerson: It probably varies with the type of business. A lot of businesses take about 15 months to prepare for sale, but most people are surprised when you say 15 months - they think that's too long. 

One of the most important things is that the sales are being reported. Some business owners tend to put some money in their pocket, and when that's happening you can't show it on your tax returns. 

All lending, all analysis by the buyer goes off the tax returns, so if the tax returns don't show the correct level of sales then that will affect the selling price of the business. If you're an entrepreneur, make sure you report all your taxes, and do it for at least 12 months so you can get it on your tax return, because that's the basis of a lot of the negotiations about the selling price.

A lot of business owners wake up one morning and say "I'm done, I want to get out of this, I'm putting the business on the market". It can be a quick decision, or they think about it for a long time but they fail to take the right steps to put things in place. 

One of the things I encourage a seller to do, one of my golden rules, is to look at the transaction through the eyes of the other party

It could take six months to finally put the business on the market and sell it, but if you haven't been reporting the sales, improving the look and feel of the business, etc, you're wasting that time. It takes a long time to sell a business so it stretches things out if you haven't prepared properly.

BFS: What other things can business owners do to maximise the value of their business before selling?

AR: One of the things I encourage a seller to do, one of my golden rules, is to look at the transaction through the eyes of the other party. A lot of sellers are so used to doing the same things day in, day out, so that's their world, it's how they see things. 

A buyer comes with a different perspective. They're seeing it for the first time, so they're looking at the conditions of the business, the visual conditions - is it painted, does the carpet need replacing, does the equipment need replacing? Do the employees look motivated - all sorts of things like that. Looking through the eyes of the buyer will help guide the seller.

Make sure the legal paperwork is all in order. If there's a lease, make sure it's up to date and in order. Make sure the legal entity is up to date. 

If it's a corporation make sure the minutes are recorded correctly. Check through the financial statements and do some due diligence so you're ready for questions the buyer's likely to ask you.

BFS: How difficult is it deciding when is the right time to sell, given the numerous factors involved: your personal circumstances, market conditions, condition of the business, and so on...?

AR: It's really tough. Timing the market is so hard to do, especially with a privately held company, because the business owner tends to make the decision to sell up when they get to a certain emotional point - when they've reached their financial goal, when they're tired of running their business, sick of dealing with employees or dealing with the government. It becomes an emotional decision rather than a matter of fact decision, so it really varies with each party. 

And one of the problems you find is some businesses are sold in the wrong phase of the economic cycle. If the business is in decline then that's a big challenge for the buyer, who wants to see the business improving. So if you want to sell your business, try and sell it on the up rather than on the down. 

BFS: Why should a business owner appoint a broker?

AR: If you are looking to sell your business privately, it helps to put a professional between you and another party. 

Most buyers and sellers haven't bought or sold a business too many times. There are some rules you need to follow, and having a professional in the middle can really help smooth the waters. The professional knows what to disclose and in what order, and can act as a sounding board for both parties.

You need a willing buyer and a willing seller. If neither party is willing then the transaction will fall over. Having an intermediary helps a willing seller and willing buyer reach an agreement.

BFS: On what basis should you appoint a broker?

AR: The most important thing is the trust; you've got to be comfortable and have a trusting relationship. 

Ethics is important to me. When decisions get made they often need to get made at an ethical level. Ethics must be understood by everyone in the transaction and everyone must be willing to tell the truth with regards to what is happening. 

In California, where I am, you need a licence, so it's important in states with licence requirements that they have a licence.

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