The reason our business started is due to the incredible inefficiencies involved in business transfers. No matter how you intend to leave your business, one way or another every business owner will eventually leave. But, according to a 2007 Mass Mutual survey, nearly a third of business owners do not have an exit plan. A PriceWaterhouseCoopers survey said 43% of their respondents had done little or no exit planning. This lack of planning will certainly leave money “on the table”, but it does not end there. Everyone from employees, customers, vendors etc are better served by a smooth business transition. This issue is problematic since it will increase over time; the first Baby Boomers turned 63 this year, and many of them are small business owners.
The most popular exit strategy according the PWC study was “Sale to Another Company”. According to Tom West, 20% of the 5.5 million businesses under $10 million in annual sales are for sale each year, and less than 25% actually sell.
Although there are many alternatives to selling to another company, for the purposes of this article we would like to focus on what business owners should be doing now in order to make their businesses more valuable to a buyer. These tips should help you run your business more successfully, and increase the likelihood of a sale, even if that sale is 5-15 years in the future.
1) Systems Sell – Most small businesses purchased are bought by investors or owners who are seeking a reliable cashflow. Systems that are recorded, tracked, and proven give the prospective buyer confidence the business will continue to run smoothly, and therefore reduce the risk. This makes a business much more attractive and valuable to a larger group of buyers. This is why proven franchises such as a McDonalds sell for a high premium.
Systems can cover everything from marketing, hiring, developing, service, etc. If you begin to track and record your systems now, your business will be much more valuable later.
2) Employees – If your business is all about you, it is not worth much at all. That translates to a significant amount of risk for the buyer. In addition, if the success of your company depends up a couple of key employees, there is a tremendous amount of risk. The goal is to make yourself as insignificant to the future of the company as possible. In addition, you need to make sure your employees are incented to stay with the company for the foreseeable future. This can be done with monetary or stock bonus plans, or something as simple as a non-compete agreement, or employee contract.
3) Tax Strategies – We are not qualified to offer tax advice, but we can say we have seen an astonishing difference between the taxes paid on very similar businesses simply due to some pre-planning. There are too many strategies to list here, but suffice it to say you need to get qualified advice from someone who specializes in business transitions. Think about what a 10-20% difference means to you when you sell your business.
4) Customers – Most businesses are their customers. If you have a diverse base of loyal customers, your business will be much easier to sell. If you are like most businesses, you have a high concentration of your revenue coming from a handful of customers. You need to come up with ways to put those customers on annual contracts, or long term incentive plans. In addition, try to get more revenue from your smaller customers. Can you introduce new products?
5) Revenue – Bar none, companies with higher revenue are more likely to sell, and more valuable. Statistically, revenue is even more important than the profit percentage. Do whatever you can to get your business to the next revenue level. The levels we use are $1 million, $5 million, and $20 million. After realizing those revenue numbers, your company will be significantly more valuable, and saleable, than under those numbers.
Mergers & Acquisitions (M & A)is a unique business opportunity to sell their business, but because most business owners only sell a business once in their careers, they learn too late how to work with business brokers, business valuation firms, and investment banks. Princeton Capital is an M&A intermediary in the CT NY area that provides value beyond that of a typical business broker. Princeton Capital can bring more qualified buyers to a business owner in less time, because our methods come from world-class investment banks instead of typical business brokers. 
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Thanks for posting the five things you know to sell a business. I particularly like the advice on “employees”. If your business becomes all about you, you lose. If you, as president and founder, are integral to the success and/or failure of the business, you have definitely done something wrong or hired the wrong type of employees.
When considering each of your points, particularly Systems Sell, being able to show a business that is clearly organized is a plus. The buyer will be more impressed knowing the “system” exists and that there is documentation, a standard operating procedures manual. The same sort of documentation for personnel standards, etc. The tidier the package when someone considers buying the more likely the business is to sell.