Identifying Pre-Sale Improvements to Attract Business Buyers and Build Value

The decision to sell your business marks a significant milestone in your entrepreneurial journey. It's not just about finding a buyer; it's about presenting your business in the best possible light to secure the highest possible sale price. To achieve this, you need to identify areas of improvement that can enhance your business's appeal to potential buyers and understand what buyers want when buying a business. To boost the value of your business and prepare it for sale, owners should aim for a structured approach to pre-sale enhancements.

Pre-sale improvements have two main objectives: to enhance strengths and overcome weaknesses that most contribute to the value of your business. For example, financial condition is a strength every buyer seeks. If the cash flow of your business is weak, or even if it is in good but not great condition, aim to make it a high target for pre-sale improvement. Or, conversely, if your business has a reliance on only a few clients, or lack of key staff who will continue after the sale, buyers will view these conditions as purchase deterrents and therefore weaknesses.

Setting Pre-Sale Improvement Objectives

One of the first steps when planning your exit is to conduct a thorough assessment of your business's current condition, to address areas in need of improvement. From sales and profits and addressing legal concerns to improving marketing strategies and strengthening management and staff, there are many areas of an enterprise that can be streamlined and optimized to increase the value of the business.

Strengthening Sales and Profits

To develop sales and profits, work with your management team or a consultant as you consider the following actions:

• Assess how the sales and profits of your business have trended over the past three years.
• Review your business model, which is a description of how your business makes money. Analyze whether there are revenue sources that could be developed, for example, online sales, sales of accessory items, or service agreements, and, if so, consider a reallocation of business resources to those areas.
• Identify purchase patterns or successful marketing campaigns you may be able to build upon or replicate. Also, identify seasonality patterns that provide opportunity to increase production, pricing, and sales.
• Determine if you can reduce the cost of sales, and therefore increase profit margins, perhaps through bulk purchases, diversifying suppliers, and reworking or diversifying supplier contracts, which may also lower supply-chain risks.
• Reassess pricing, increasing margins or rates on your high demand unique offerings and adjusting prices, based on competitive research, to win either more sales or greater margin on widely available offerings.
• Look for areas in your business where you the have capacity to grow.
• Identify which products or services deliver the lowest- and highest-profit margins and decide whether you can shift sales emphasis from one to the other.
• Develop streams of recurring revenue, automatically repeating sales or, for service businesses, service contracts. These provide revenue predictability, lower marketing costs, and high attractiveness to buyers.

In addition to strengthening revenues and profits prior to your sale offering, be aware that buyers want to see key areas of growth potential, and therefore revenue potential. Be ready to highlight areas where your business is not currently at full capacity, and therefore areas that present opportunity for the new owner to experience business growth.

Enhancing Financial Condition

To strengthen the financial condition of your business, work with your management team and accountant to consider the following actions:

• Optimize accounts receivable by promptly following up with past-due invoices, creating payment plans for late-paying customers, and introducing incentives for early payments and penalties for late payments.
• Negotiate terms for accounts payable, including early payment discounts and/or longer payment cycles.
• Reduce expenses by eliminating unnecessary purchases, renegotiating vendor pricing where possible, or shopping for less-expensive alternatives.
• Reassess inventory needs, buying less if stocks are sufficient and renegotiating or shopping for better or bulk pricing for future purchases.
• Consider seeking a small business line of credit to preserve cash flow.

To present necessary financial statements for the past three years, work with your CPA to prepare the following:

• An income statement, also called a profit-and-loss statement.
• A balance sheet, which presents the financial condition of the business.
• A seller’s discretionary earnings (SDE) statement, which recasts the income statement into a pro forma estimate of how much money the business generates annually for the benefit of its owner. This is also called an adjusted cash flow statement or a statement of recast earnings. It is of primary interest to a buyer. While the income statement reflects deductions for every allowable business expense and legitimately minimizes profits and taxes, the SDE statement is a recast or “normalized” income statement that adds back deductions for interest, depreciation, taxes and amortization, one-time expenses, expenses (including salary) that benefit the owner directly, and discretionary expenses another owner might not choose to incur. The result is a bottom line that reflects how much the owner earns or benefits annually from the business.

Addressing Legal Considerations

To address unresolved issues that affect the legal condition of your business, seek legal advice as you examine and plan to address the following issues:

• Patents that will be part of the business sale must be current, not nearing expiration dates, and owned by the business and not by the owner personally.
• The lease for the business location must be current, assignable, and transferable. If the location is essential to the ongoing success of the business, it should extend at least five years into the future, ideally with lease increases protected by rate escalation clauses.
• The business must be clear of any zoning-regulation violations. If there are pending regulations or grandfathered variances that a sale may void, be prepared to disclose these facts rather than have them discovered during due diligence.
• Any legal claims, encumbrances, or liens against the business should be cleared prior to the sale offering.
• Pending or unresolved lawsuits must be concluded before the sale or disclosed early in the selling process, long before due diligence discovery.
• If your business has faced or faces employee-related issues, be prepared to disclose the problems and outline the steps taken to preclude similar issues in the future.
• If your business has had regulation or law violations, or environmental or safety compliance issues, the expenses will be yours to address. Additionally, the risk must be overcome, or you should be prepared to assure the buyer of controls that will avoid recurrence of the violations.
• Be sure all licenses are up to date.
• Be sure any necessary third-party consents to your sale will be easily obtained. As a key step in preparing for legal due diligence, you will also need to assemble all the documentation the buyer and buyer’s advisors will require. Seek advice from your attorney and broker, if you are using one, as you compile the necessary information.

Improving Marketing Strategies

To strengthen the marketing of the products and services of your business, consider the following actions:

• Be prepared to present how your products and services are decidedly better and preferred when compared to competing options.
• Be prepared to present how your products and services are produced using a process that is difficult to copy but easy to adopt and follow.
• Review and improve product presentation and packaging to enhance visual appeal and to reduce cost, waste and environmental impact.
• Improve and document proprietary production processes.
• Consider creation of automatic purchase programs, complementary products that provide new streams of revenue, and bulk or repeat purchase incentives.
• Study online reviews for your business and products. Especially if existing reviews are dated or less-than sterling, cultivate new reviews by personally inviting your best customers to share their opinions.
• Provide the URLs of sites prospective buyers will likely check, taking care not to violate review site rules by offering payment for good reviews, inspiring negative reviews of competitors, or posting reviews misrepresenting yourself.

Addressing Location-Related Challenges

To strengthen or overcome conditions that weaken your business location, consider the following actions:

• If your business relies on its local market for customers, and if those customers are showing declining interest in the products or services of your business, consider product revisions to increase appeal. Also, consider product and marketing adjustments that attract new customers from the local market, from nearby markets, and from markets that might be served remotely.
• If your business relies on the local market for staffing and finds employee recruitment increasingly difficult, review the competitiveness of the salaries, benefits, and conditions your business offers, while also considering how a remote work force could compensate for the availability of local market employees.
• If your business sector or industry faces regulatory, legal, or growth challenges, consider how you can shift the emphasis of your business and its offerings away from high-risk aspects and toward undamaged niches of the industry.
• If your business has not adapted to recent industry changes, plan to make necessary adjustments to bring it into alignment with industry standards prior to a sale offering.
• If your business location attracts foot traffic, review and update business signage, point of entry, and interior, ensuring that it is clean and in condition to make a strong first impression.

Local business groups and industry associations are resources to tap as you make pre-sale adjustments. Showing membership in such groups enhances business attractiveness, both by demonstrating market and industry involvement and by creating positive connections with those a buyer may contact while forming impressions about your business as a purchase prospect.

Improving Facilities and Equipment

To make improvements to the facilities and equipment of your business, consider the following actions:

• See that all equipment is in good order and ready for presentation, not only through a facility tour but also in the form of an asset list that itemizes furnishings and equipment either by type — such as office furniture, computers, production equipment, and so forth — or by the way they are used in your business.
• If equipment is owned rather than leased, confirm that it is owned by the business and not the owner, and that titles are free of liens or encumbrances.
• If equipment is leased, review the stipulations, length, and transferability of contracts.
• See that all manuals, leases, service contracts and other supporting documents are ready for presentation.

Enhancing Capabilities and Processes

To strengthen the capabilities and processes of your business, consider the following actions:

• Define the capabilities that most contribute to the success of your business, for example, product production, sales, customer service, and the processes involved with each.
• See that business processes are detailed in process manuals.
• Write or update your business plan and create a short-form version that presents an overview of the business, its mission statement, key products or services, its business model, and business goals and objectives.
• Write or update your marketing plan and create a short-form version that describes your market situation, market position, brand statement, and strategies for products, distribution, pricing, and advertising and promotions.

Strengthening Management and Staffing

To strengthen the management and staffing of your business, consider the following actions:

• Create and train a management team that is committed to the business, backed by solid training and transferable employment contracts. This increases the likelihood that management team members will stay with the business after the sale and contribute to a successful ownership transition.
• Create employment policies that are outlined in an employee manual or handbook that brings together employment and job-related information and clarifies policies.
• Create an organization chart or a description of your business organization and structure that will reinforce your plan for an easy ownership transition.
• Document your personal role and responsibilities in the business and, if necessary, create a plan to shift responsibilities to key managers or staff who are likely to remain with the business after the sale.

Boosting Clientele and Reputation

To strengthen the clientele, client relations, and client databases of your business, consider the following actions:

• Review the condition of your customer database, or create one if necessary, and update entries so they are current at the time of business transition.
• With your attorney, review current client contracts for accuracy and transferability.
• If necessary, reduce reliance on one or a few clients by developing a broader customer base.
• If necessary, reduce the reliance of key customers on your personal presence and interaction by developing their relationships with and confidence in key managers or staff members.

To strengthen the brand and reputation of your business, consider the following actions:

• See that your website is well designed, well optimized for search, quick to load, and owned not by you, personally, or by its designer, but by the business and therefore transferable as part of the sale. If you have not done so already, secure your business name with your state’s business filing agency, and also secure it online as a domain name and across social media channels.
• Unify your business identity across all signage, displays, advertising and sales materials.
• Review search results and create a plan for generating positive reviews and publicity, if needed.

The process of selling your business involves a lot of planning and preparation. Identifying and addressing pre-sale improvements is essential to make your business more appealing to potential buyers and maximize its value. By systematically strengthening your business's strengths and addressing its weaknesses, you can create a compelling package that attracts discerning buyers. Furthermore, a well-prepared business is more likely to command a higher sale price and ensure a smooth transition. Visit the BizQuest Broker Directory to find a broker to help guide you and help identify pre-sale improvements to implement.