As we get to the start of a new year, we think of the changes we can make in our lives and businesses to make them better. If one of these changes you are considering is moving on, please put together a transition plan. Don’t close your doors and walk away from an asset you’ve spent all these years building. If you’ve built it right, your business has value and there are people out there who are looking to develop or buy a small business like yours.
What are you selling?
You are selling your business as it sits today. You are not selling potential or “what-ifs.” A savvy buyer is not going to pay for your unrealized potential. If you think your business would be more successful if you opened an additional day every week, then open that additional day before you sell. If you feel that there is a specific service could be added that would create more profitability, then add that service. If fresh marketing campaigns could be launched to increase revenue, then launch it.
Do not value your business as though these changes are already in place. Telling a prospective buyer that the business would be worth the price you are asking if these things were in place doesn’t make sense. A prospective buyer will see these as things that will cost them money, hence they should realize the benefit and not pay you for them at the close of the transaction.
You are selling cash flow, EBITDA, functioning equipment, an operational business, process and procedures as-is/where-is. For this reason, a valid lease with at least a five-year term should be in place. More than likely, a buyer will re-negotiate the premises lease. Their offer to you may be contingent on their ability to do this.
The business and assets you sell must have clear title and be lien-free. It is a good idea pull a title search and credit report on the business as part presenting the best possible curb appeal. Nobody likes surprises.
Every buyer thinks that they can run your business better and make more money than you can. Don’t let this make you angry or put you on the defensive. If a prospective buyer approaches you, wants to buy, and acts in an arrogant manner, nod and let them talk. Tell him how interesting you find their insight. Don’t ever forget; your business is doing great, otherwise they wouldn’t be interested.
You should always anticipate obstacles and questions that a savvy buyer might have.
What are some considerations about your business if you intend to sell it?
Manage your business as though you intend to keep it forever even while you are going into “selling mode”. Make the business decisions and purchases you would if you were planning to keep it. Prepare and manage your business to show it with the greatest curb appeal imaginable.
Get your books in order and know where you are in your business plan. Keep all equipment operational, serviced, and clean. Mind your online reputation. Prepare a list of assets. Know the outstanding balances of loans, and expiration of leases.
Do not tell anybody that you are planning to or considering selling. Gossip spreads quickly and there is no way that having this information out in the market will never increase the value of your business. Confidentiality that your business may be available for purchase must be maintained until the business is sold.
Know what your liabilities such as gift certificates, memberships, and pre-paid services are and what you plan to do about them if someone else owns your business. Be prepared to negotiate this but have a plan on what you are and are not willing to do.
You cannot sell a business where you are the business. The only way you can do this is if you stay on-board after the sale for no pay and continue to perform services. You cannot sell the business and then leave if you are taking the business with you. If you are a practitioner, you should not be working in the treatment room any more than 25-30% of the time and should not be responsible for more than 10% of the revenue. It is best if you are not in the treatment room at all. Remember, a buyer is buying revenue, cash flow and assets that they can, at a minimum, maintain as they assume ownership.
Collections do not equal sales. Sales are the services and products you sell. Items you receive for pre-paid services such as Gift Certificates, Gift Cards, Series, Packages & Memberships are services that you will perform at some future date. They are business liabilities that a prospective purchaser will need to take responsibility for. Make sure that the outstanding values of these items are clearly defined in your offer to sell. If you use your bank statements to show revenue, you cannot know your profitability or show a buyer available cash flow.
It is less expensive (and less risky) to buy a going concern rather than building from scratch if you are a buyer. Keep this in your back pocket. If someone is looking to open a business or practice, it will cost them less money to buy an existing business than it would for them to build out raw space in a new location. Additionally, there is less risk as the operating business has an established reputation, a history of sales and profitability, and an established clientele. The business is set up and ready to go for the most part. The space is built out and the assets are in place. All of this must be re-created and paid for if a new owner wants to build a brand-new facility.
Verify value with a banker who would fund the transaction. If possible, you really do not want to carry a contract. When you sell your business, you want to be paid cash and be done. Finding a banker who will fund the purchase to a credit-worthy buyer will eliminate the need. Establish a relationship with a lender and let them help you define a value of your small business. Ask them to define what their financial and operational criteria is of a borrower that they would lend to buy the business. This will put you in a position to not have to accept terms or a financing contingency and know if you are dealing with a financially credible buyer.
Consult with your tax accountant. Know what tax implications selling your business will have.
Be prepared, have a plan.
Some closing thoughts.
Chances are, you have probably already met the buyer of your business. You may choose to employ and “groom” your buyer. Consider taking on an associate. Other prospective buyers may be a current guest, employee, or subcontractor. Your banker or CPA may have clients or know of someone that is in the market for a small business, spa, or clinic like yours.
We are in a market where “roll-ups” are becoming more commonplace. This means that investment groups are looking to buy several common or complementary businesses, create one management group, buy others and then “roll them up” together into a larger company that can be sold. The thought here is that the sales and profit will be much greater than a single business and command a higher value.
Value is based on a calculation of multipliers of revenue and net profit. Somewhere between these two calculations is a reasonable value. These multipliers vary depending on the type of business (medical or spa). If your numbers are in order and profitability is clear, calculating this value is not a complicated task.
We are available and willing to help if you’d like talk. As always, the first conversation is free.