8 Steps for Preparing Your Business for Sale

When building a company, very few new business owners take the time to envision the day they will sell their business. But they should. Building a company is a journey with the goal of creating and maximizing enterprise value. And when an owner decides to sell, the hope is that they have positioned their business to realize that value. Here are 8 steps to help drive that eventual outcome.

1. Know your motivations

Before you go to market, ask yourself: Why am I considering selling the business? And if I sell it, what do I hope to accomplish? It’s important to clarify your motivations before you spend all the time, resources and opportunity costs required for a successful sale process.

How important is legacy to you? The answer to this question will help determine the type of buyer you should target and the type of transaction structure to consider. You might be compelled to transfer a minority interest to family, sell to a management group backed by a sponsor, or utilize a tax-efficient (ESOP) structure. Conversely, if legacy is not a priority, you might do better selling 100 percent to a strategic buyer or private equity-backed company.

2. Understand value drivers

Building a business entails increasing its value from year to year while mitigating risk factors. To do that, you must understand what drives premium valuations in your industry and continuously incorporate those drivers into your company’s growth strategy.

Traditionally, when people talk about selling a business, they focus on steps to take in the months prior to the sale, or maybe two or three years out. But from day one of your business, it’s essential to develop a strategic plan focused on the most critical value creation drivers and how you will implement them during the business’s life cycle—including things like corporate culture, scalability of business model, recurring revenue streams, digital channels, the “stickiness” of customer relationships, organic versus M&A growth, and intellectual property development.

3. Diversify the revenue base

Some components of your strategic plan will take several years to implement. This is one of them. Your goal should be to diversify your revenue stream in all respects—including product, customers, and geography.

For instance, in most cases, it’s not advisable to allow a single product to make up the vast majority of your sales. If anything occurs to diminish that product, you could experience a disproportionately negative impact on your business and its profitability. Additionally, having customer concentration of greater than 15 percent will often result in a materially discounted valuation or, in extreme cases, make the business unsalable.

4. Grow market share

Companies grow market share organically or through acquisitions. In the best of circumstances, a business can grow both ways.

For a company already growing organically, acquisitions can turbocharge enterprise value, particularly if you pair the value drivers of your acquisition target with those of your industry. Drivers like a new product line, profitable customer base, geographic beachhead, or an excellent management team can help accelerate the value of your business by many years.

5. Avoid the trap and fortify the management team

One of the biggest mistakes of business owners is to make the company too reliant on them. This is often referred to as the “founder’s trap.”

The goal of company founders should be to build a team that eventually can operate independently on a day-to-day basis. Thus, as your business grows and evolves, you should constantly be asking: What are the management skills and resources we need to move the business forward? This often involves bringing aboard managers and outside advisors with experience supporting larger organizations.

6. Optimize the corporate structure

One way to do this is to eliminate unnecessary corporate entities. For example, some businesses might have been formed as a limited partnership (LP). An additional business entity, an S corporation, might have also been created to act as the general partner in the LP to minimize liability to the partners. Rather than keeping this structure, the business can reorganize as a limited liability company (LLC), which for most taxpayers encompasses the LP plus the S corporation structure.

Additionally, it’s important to separate your personal expenses and assets from those of the business. For example, it’s not unusual for a business owner to pass certain personal expenses through the company. Reconciling such “owner addbacks” can help increase enterprise value and portray a true cash-flow picture for potential buyers.

7. Execute tax and estate planning

Working closely with an advisor on tax and estate planning well in advance of selling your business is critical. A qualified advisor can provide guidance on both income and estate tax laws, which are complex and subject to change. If you understand your motivation for a potential future sale of the business, incorporating income and estate tax strategies can provide significant benefits upon the sale.

Often, the owner does not consider planning until the letter of intent is signed. Because the letter of intent establishes the value of the business, planning after this point might not yield as much benefit as planning prior.

8. Maintain business as usual

Finally, in preparing your business for sale, it is important to operate the business as usual— continue to invest in systems, people, new products, customers, and geographies that all align with your value creation strategy. This approach will help ensure buyers evaluate your business relative to its potential to capitalize on future growth opportunities that will drive their return on investment.