Whether you’re looking to retire, add a strategic partner, or capitalize financially on your hard work, there are several key steps to ensure you get the highest possible return on your investment and the structure best aligned with your non-financial goals. Here’s a comprehensive guide of what we at Exit GM work with clients on to maximize the value realized when selling a services business.
This guide was crafted with recurring revenue businesses in mind, specifically janitorial, landscaping, gutter cleaning, power washing, etc., but will also apply more broadly.
1. Understand How A Business’s Valuation Is Calculated
Before putting your business on the market, you need a clear understanding of its value. Several factors influence a home and business services business’s worth, including:
Financial Performance: Buyers will closely examine financial statements, including profit and loss statements to calculate expected cash flow. They also are looking at any unexpected peaks or valleys in revenue. Ensure these documents are accurate, up-to-date, and professionally prepared, and that there is a story to be told with them.
Client Contracts: Long-term contracts with clients can enhance the business’s value. They can provide stability and predictable revenue, which is appealing to potential buyers. Understand the proportion of total revenue, client type, and typical profit margin of these accounts as compared to the overall average. Be prepared to show the proportion of accounts that are residential, corporate, and government customers.
Assets and Equipment: The condition and value of your equipment, vehicles, and supplies inventory can impact the valuation. Ensure all assets are well-maintained and listed in your balance sheet or a separate inventory. For general supplies, no need to have inventory down to a pencil, however, it is important to show a consistent level of purchases to maintain the business operations.
Consider hiring a professional business advisor such as Exit GM to get an accurate valuation and identify areas for improvement.
2. Improve Financial Performance
Enhancing your business’s financial performance before selling can significantly increase its value. Sometimes timing does not work out for this, however, valuation is generally maximized when able to show increasing revenues. This can be like trying to time the stock market, but generally better to sell slightly early with capacity left rather than being maximized out or turning downward. Here are some strategies to consider:
Strengthen Operations: Streamline operations to improve efficiency and profitability without impacting quality. This might include upgrading broken equipment, reducing waste or route inefficiency, or negotiating better supplier terms.
Reduce Expenses: Cut unnecessary costs to improve profit margins. Buyers look for businesses with strong financial health, so eliminating inefficiencies can make your business more attractive. Be careful to not trim too much. Being too thin can be sustained short term but will eventually cause the business to break. Remember, the key is excess expenses. If concerned about reducing, at least identifying opportunities will strengthen your story with prospective buyers.
Increase Revenue: Look for opportunities to boost revenue, such as expanding your service offerings, targeting new market segments, or increasing your pricing strategically.
3. Prepare Your Business for Sale
This is where an experienced advisor such as Exit GM can provide great dividends. The presentation of the business can make a substantial difference in the valuation. Need to create a strong story of the past, present, and future which is backed up through the documents. Here’s how to prepare:
Organize Documentation: Ensure all legal, financial, and operational documents are organized and accessible. This includes licenses, permits, contracts, and employee records.
Enhance Curb Appeal: First impressions matter. Clean and maintain your facilities and vehicles to present a professional image. Fix and repair peeling paint, replace old light bulbs, and install new floor mats. This also applies to the digital curb appeal. If necessary, a small investment into the website will pay dividends as well. It is amazing how far a few thousand dollars can go.
Address Legal and Compliance Issues: Resolve any outstanding legal or compliance issues to avoid complications during the sale process. Buyers prefer businesses with no legal entanglements.
4. Find the Right Buyer
Targeting the right buyer is crucial to getting the best price. An experienced advisor such as Exit GM will understand potential buyer options in the market to align with the seller’s goals. Consider the following:
Strategic Buyers: These buyers may be competitors or companies looking to expand their service offerings. They might be willing to pay a premium for a business that complements their existing operations.
Financial Buyers: Investors or private equity firms might be interested if they see growth potential in your business. Highlighting your business’s profitability and potential for expansion can attract these buyers.
5. Negotiate Smartly
Effective negotiation can significantly impact your valuation. Here are some tips:
Be Prepared to Justify Your Price: Be ready to explain and justify your asking price based on the business’s financial performance and growth potential.
Stay Flexible: Be open to negotiating terms and conditions. Flexibility can help you close the deal faster and at a better price.
Ask For Others: Be open to considering secondary payouts or performance bonuses for supporting the new owners realize incremental value or maintain performance over a few years.
6. Work with Professionals
Engaging professionals can simplify the selling process and maximize your income:
Business Advisor: An advisor can help you find qualified buyers, negotiate terms, and handle the sale process. Besides maximizing value, a good advisor will also make the process go much smoother.
Accountant: An accountant can provide valuable insights into your finances and help with tax planning related to the sale.
Attorney: An attorney specializing in business transactions is a must. Do not use a generalist or be the transaction to provide their education. Transactions are complicated and unique, especially with strategic and financial buyers. A good transaction attorney can assist with drafting contracts, handling legal issues, and ensuring compliance with regulations.
7. Plan for Post-Sale Transition
A smooth transition can enhance the sale’s success and value. Plan for:
Are You Staying Onboard: Are you planning to stay onboard with the new owners as an employee? Depending upon your specific role in the business, this may even be required. The compensation and terms will be key considerations for the transaction. This is an area in which an experienced advisor can add considerable value.
Training and Support: If not staying on long term, offering to train the new owners and assist during the transition period can be a valuable negotiating point.
Client Retention: Ensure that your clients are informed and reassured about the change in ownership to maintain business continuity.
Employee Retention: It is also exceptionally important to ensure that your employees are informed and reassured about the change in ownership and how it impacts their lives. It may even be prudent to consider some sort of retention bonus for key employees, or even everyone.
Conclusion
Maximizing the valuation from selling your business requires a combination of financial optimization, strategic preparation, and professional guidance. By understanding your business’s value, improving its performance, and effectively negotiating with buyers, you can achieve a successful exit and realize the full potential of your hard work.
Selling a business is a significant decision, and with the right approach, you can ensure that you receive the highest possible return on your investment.
About Exit GM
Exit GM is a concierge M&A advisory firm that specializes in assisting business and healthcare entrepreneurs.
Exit GM levels the M&A playing field for moderate-sized business and healthcare practice owners seeking to maximize the value of the most important asset. Exit GM supports entrepreneurs excel on the M&A playing field, whether it is through transacting with a strategic investor, a financial partner, or acquiring additional locations.
Commentaires