How to Sell Your Business, page 11

Managing Revenue, Expenses, and Income

Since the valuation of a business depends on financial metrics—specifically, earnings (or free cash flow) and revenue—it makes sense to manage these to produce as high a sales price as possible. This can be done if you have some advance lead-time.

Clearly, earnings are easier to manage than revenues. With fixed revenues, raising income is a matter of decreasing expenses. If you are planning to sell your business, being as frugal as possible makes sense. Perhaps you can do without an employee, can cut back on advertising, or sublease some of your space. There are many possible ways to cut your expenses, most of which will not hurt the long-term prospects for your business. Also, if you have personal expenses charged to the business, which would have to be recast with adjusted financials, this is a good time to get them off your books (raising stated income and making less need for recasting statements).

Revenues cannot be fiddled with quite so easily. Raising revenues is more an issue of concerted effort. If you’ve had good ideas about how to generate greater sales, this may be the time to try them. For a retail business, this might involve a targeted sales campaign. Wholesale businesses might try approaching important new accounts.

Selling a business involves painting a picture, with financial results being one of the most important aspects of the picture. The ideal story you could paint would be one of steadily growing sales and earnings, with the rate of growth increasing, and the whole thing just before the inflexion point where it really takes off. Your management of revenue, expenses, and income should attempt to paint a picture as close to this one as possible.

If a business is losing steam, it is not a good time to sell it, at least in terms of the price you will get. In addition to managing financials, you should attempt to predict to yourself as honestly as possible what the future will bring. If today’s trend is up, but you expect this to end, then it is a good time to sell. Try to pick a good spot for jumping off, because timing has a huge impact on price.

Keeping the Team Together

It’s likely that as part of the sales agreement you will agree to work for the new owner for some length of time. This may be for a short transitional period, or it may be for a number of years. However, even if you agree to work for the new owner for a long time, the truth of the matter is that it may not work out. It is often the case the entrepreneurs—and original owners—do not make good employees. And, even if you would make a good employee for the new owner, isn’t the whole point of selling your business to allow you to spend your time lolling on a Caribbean beach sipping drinks with fanciful umbrellas stuck in them?

It’s important that key personnel be on board to help with the transition and future management of your company (under new ownership). That way you can position your departure as relatively insignificant.

Continued next page

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