Follow these tips to get the most out of the sale of your small business.
By Barbara Marquand
When Mario and Bonnie Coelho bought Arizona Power-Vac in 1991, they were already planning how they’d sell the Tucson ventilation-system cleaning business five years down the road.
With a business strategy focused on broadening their client base, the Coelhos first increased advertising and began bidding on local and state jobs, as well as residential and commercial work. Then they upgraded old equipment to increase efficiency and lower overhead, while also avoiding any long-term debt that wasn’t essential to growing the business. In just five years, when annual revenue climbed from $100,000 to $500,000, the Coelhos decided to sell their investment for a tidy profit.
The time to start thinking about selling a business isn’t when you’re burned out or ready to retire, say experts. It’s now.
“Generally, you should be planning an exit strategy from Day 1. That ought to be part of the business plan,” says Michael Harris, vice president of Tucson Business Investments, a business brokerage in Tucson, Ariz.
So where do you start?
Clean the Books
“Straightening out the business’s financial records is essential” says Paul Schaye, managing director of Chestnut Hill Partners, a New York mergers and acquisitions firm. “That often means resisting the greater short-term benefits of maximizing questionable or liberal tax deductions. You may be able to squeak it by the IRS, but taking iffy deductions can shrink the business’s bottom line” he says. “Having relatives on the payroll, for example, is fine as long as they’re legitimate employees. Paying your husband $100,000 to work as a secretary will lower your net and your tax bill. But it may bite you down the line”
Schaye adds. “The job should justify the salary. Likewise, extravagant deductions with only thin ties to the business multiple cars, country club memberships and Hawaiian vacations should be eliminated”
Schaye says. “Ask yourself, ‘How would a public company operate this business?’ Then think like a public company.”
Consider that the typical business sells for three to eight times its annual profit, so every deduction you take cuts the selling price by that multiple, says Russell Brown, author of “Preparing Your Business For Sale” and president of RDS Associates Inc., a Niantic, Conn., appraisal firm. Suppose, for instance, you deduct $4,000 to go to a weeklong convention in Florida. If you skip the convention, you’ll pay roughly another $1,000 in taxes that year. But your annual profit will jump $4,000, which would translate into an additional $12,000 to $32,000 in the selling price.
So why not take the deduction for the convention and just tell the buyer that the trip isn’t necessary for running the business? You can try that, but a buyer will never be sure that’s really the case, Brown says.
Meanwhile, it’s not unusual for owners of tiny businesses to skim cash. Harris strongly urges that they keep their hands out of the till. Not only is skimming illegal, but it makes it difficult to show the company’s true income. Why should a buyer trust sellers who claim that a business generates more cash than what you show on the books? That’s a big turnoff to a buyer, says Mario Coelho, who, with his wife, Bonnie, buys small businesses, fixes them and sells them for a profit. “You have to declare all income. You don’t try to hide it,” he says.
How Much Is It Worth?
Once you’re sure you want to sell, Brown says, contact a business appraiser to determine the value of the business. Business brokers, who bring buyers and sellers together, can also help you determine value, but keep in mind that they have an interest in the business selling so they can collect their commissions. Some brokers may give a high-ball figure to get you to list the business with them, and some may give a low-ball figure to sell the business quickly. “Go to an independent source before you go to the business broker,” Brown suggests.
Try to get the business appraised at least two years before you want to sell, so you have time to make any changes suggested by the appraiser, Brown adds. But if that’s not possible, an appraiser can write an estimate of what the business is worth Ñ taking into account expenses that a new owner could eliminate. A business broker then can show that independent report to buyers.
Ideally, however, you should plan far enough ahead to follow an appraiser’s guidance for making the business as profitable as possible to appeal to buyers.
That’s what Bob and Cindy Marn did after they decided to sell their Atlanta-based business, Allegra Print & Imaging, about two years ago. They made double payments on all the short-term leases on equipment to reduce their debt, and they avoided buying new equipment that wasn’t necessary. “There are a lot of toys you see and think, ‘Wow, I’ve gotta have one of those,’ but you don’t really have to have them,” Bob Marn says. The couple also gave their employees bonuses for reducing paper waste, and they cut the staff to six from eight. They laid off one manager and left a position open when someone else quit.
To boost revenue, the Marns increased direct mailings and offered incentives to customers to refer others to the business. By the time they put the business on the market, the numbers looked really good, Marn says. Through a broker they found a buyer who paid just under the asking price last January.
Treat It Like Your Baby
Unlike the Marns, however, many owners start to slack off after they decide to sell because they’re burned out. “Among sellers, the biggest mistake I see is they get it in their heads they want to get out of this now, and they tend to put in less effort,” Bonnie Coelho says. “They’re bored. They’re tired.”
Owners should treat the business as if they’re never going to sell it, Harris says. “Treat it as if it’s their baby,” he suggests while reminding sellers that a deal isn’t done until it’s done. The phrase “DFT” (deal fell through) is all too common among business brokers.
Dana Kline, who sold Pittsburgh-based Dana Kline Catering, about a year and a half ago, says a key to the successful sale of her business was maintaining the same high standards that had helped build her company’s solid reputation Ñ even though she knew she wanted out. “It was very important that I not let it show,” she says. “I don’t think my clients ever knew. We spent big bucks on advertising, and we certainly kept up quality control. We always kept our standards very high.” That allowed the business to line up enough jobs to help ensure its success after the sale. Like many small-business sellers, Kline financed part of the deal, so she had a vested interest in the success of the new owner.
Sellers should also write down ideas of how a new owner could expand the business, Brown says. “Start thinking of those things you’d do if you had the capital or energy, and make them part of the strategic plan,” he advises. That may include, for instance, adding a product line or selling goods online. Details like those can spark potential buyers’ interest and help the new owners after they take over.
In addition, Pittsburgh broker James Reitz, of Reitz Business Ventures, suggests turning more of the daily operation over to a hired, nonfamily employee to ease buyers’ worries that the business can’t operate without you. “See if you can step back a little, have others take more of the calls and do more of the bidding, pricing and purchasing,” he says. “Buyers will be greatly encouraged by that.”
Be Careful Out There
Once potential buyers come knocking, don’t rush to close a deal. The Coelhos made that mistake years ago when they sold a Los Angeles printing business started by Bonnie Coelho’s father. After her father retired, the couple ran the company for several years, quadrupling its annual revenue to $1 million. But after moving to Arizona, they had difficulty managing the business long-distance and placed it on the market. “When you’re wanting to sell quickly, you’re willing to accept deals you otherwise wouldn’t,” Mario Coelho says.
The couple accepted a deal that sounded too good to be true, failing to check out the buyer carefully, Bonnie Coelho says. The new owner skipped out on the bills and defaulted on the loan. The Coelhos, who financed the deal, got the business back, moved the equipment to Arizona and started a new printing business nearby.
So what if you don’t have a few years to plan your sale? Do everything you can to maximize the look of the business, equipment and facilities. Then, have a colleague or consultant go over your books and operations. Sometimes an outsider can spot problems an owner wouldn’t notice, Harris says. But it’s probably too late to do much else. In the long run, planning pays off, he says. The more preparation you do now, the smoother and more profitable your “retirement” will go later on.