Yes, you can sell your business at a fair price – even in a recession.(from LawnandLandscape.com)
So you want to sell your service business, but you don’t have a clue how to value it? You’re not alone. Business valuation expert and author Chad Simmons explains how to transform those intangibles that make your company special into cold, hard cash.
You’re thinking of selling your service business. The recession has hit hard and you’re sick of struggling – to turn a profit on your services. You may not be ready to sell tomorrow, but you will be in the not-too distant future.
And while you believe in the viability of your company, you’ve got to build a convincing case for buyers. Problem is, you have few tangible assets and certainly no real estate. Is it even possible to value a service business, you can’t help but wonder – and if so, will it sell in today’s economy?
The answer to both questions is yes, according to Simmons who is the author of Business Valuation Bluebook, 4th Edition: How Successful Entrepreneurs Price, Buy, Sell and Trade Businesses.
“The value of any business is linked to its income, assets, and marketing opportunity,” he said. “But especially in a service business, it’s the intangibles that truly differentiate you. That means things like a well-established image, a unique product/service mix, a well-trained, fairly compensated team of employees or independent contractors, and so forth. Get those intangibles shored up and you’ll be able to determine a fair value.
“And yes, you can sell in a recession,” he adds. “Smart, visionary buyers know that now is a good time to invest. And while it’s true that many of them are looking for bargains, they also want a healthy business that has growth potential and most importantly a healthy cash flow. If you do the right things to show them you possess these two assets and also boost your value in other ways, you’ll be a lot more attractive to them than someone desperately seeking to unload a failing business.”
Simmons recommends that you keep three important factors in mind when you are positioning your business for the sale:
1. Get as many inquiries as possible. The more players you have in the game the better price you’ll be able to get for your business.
2. Present an attractive offer. Make sure your offer makes financial sense. Provide financial information and other data to back it up.
3. Remove uncertainty. Make your buyer feel as secure as possible. Provide information regarding where there is room for growth and profit for your business.
“Failure to do any of these three things and you will not sell the business,” warned Simmons.
The first and most important step is to give your service business more value. You must make the intangibles “tangible” by institutionalizing them so they become a part of the business even when you’re no longer running it. And, remember, you must start that process well before you hang out your for-sale sign.
Simmons offers the following easy tactics to consider:
• Present a compelling value. If you can’t give a buyer a good reason to lay down his money, you might as well skip all the other tactics. You won’t find anyone, especially in a recession, willing to buy a business that is on its way to the big business graveyard in the sky. “Clarify exactly why your business is valuable and make sure the buyer understands,” Simmons said. “Maybe you have the lockdown on a certain service or there is a profitable market that you haven’t tapped yet. Regardless, make it clear to your buyer that there is indeed room for growth and profit.”
• Convert client lists into contracts. Which is worth more: a business with 200 client names or 200 client contracts? Two hundred contracts, of course. Having contracts already in place for when the buyer takes over reduces his fear that clients will cancel their business when you depart, and it’s particularly important in a service business where so much of the sales process is based on relationship management. “By putting contracts in place for your buyer, you’re effectively hitting on all three of the selling factors mentioned earlier,” he said. “Most importantly, you are doing your due diligence to help your buyer feel more secure in these trying times.”
• Adjust pricing. Large businesses increase revenue by acquiring small competitors. But the strategy works only if your pricing structure matches theirs. Recognize big companies often have smaller profit margins. That means, your $1 million book of business is worth less to a large buy-out-minded competitor if your prices are lower than theirs. You may need to raise your prices in order to be an appealing business opportunity for these large businesses that could potentially be a rich source of buyers.
“Now is not the time to be timid with pricing,” says Simmons. “The economy is bad, and you’re bound to lose customers. That means, if you want to survive, you’ll have to raise your prices. If you continue to provide excellent service, your remaining customers will stay with you. In fact, a great way to think about it is that if they didn’t leave due to the recession, they can afford your price increases.
“The silver lining is that with fewer customers you work less but, because of the price increases, make the same amount!” he added. “This frees up your time to work on scrounging up some new business so the stage will be perfectly set for you to add more customers at higher profit margins when the recession ends. In short, your business will only get stronger as a result of the recession, and if you are looking to sell, that will be hugely appealing to potential buyers.”
• Transfer your knowledge. If you haven’t already (and hopefully you have), get other people involved in your duties by teaching them how to do your job. That way when you, the owner, leave the business upon sale, the enterprise won’t fall apart. If the business is of a technical nature, it is especially important to have intellectual capital in the form of people, processes, and data that allow the business to continue operations. “This is the kind of insurance potential suitors want and need to hear about,” says Simmons. “It’s yet another way for you to help them feel secure in the buy.”
• Pump up your marketing and exposure strategy. More advertising prior to a sale of the business increases the public’s awareness of your business, which can in turn help you increase the number of inquiries you receive. Also, your buyer will come from the public; the more he sees your name, the greater his perception of your presence in the market place and the more value he’ll place on your business.
• Reduce employee turnover. If your business centers around the services you or your employees perform for clients, then make sure those employees – the ones you’ve spent lots of time training – stick around. “A prospective buyer correlates low employee turnover with improved security,” Simmons said. “Showing that key employees are unlikely to leave when the new owner takes over reduces uncertainty.”
• Document and copyright your work. Turn your employee training and operations information into a manual so a buyer can take over with ease. And, you’ll have something tangible when offering to sell the business.
• Be prepared to defend. If the heart of your service business is “intellectual capital,” then protect it. Start by documenting who, what, where, when and how to prove you were there first. Use service marks and trademarks. Copyright your materials. All of these steps are necessary if you ever need to defend your stake. By doing so, you will also be able to better assess and value your enterprise for potential sale or just to improve the way you run the business.
• Offer seller financing. There are plenty of qualified professionals who’ve recently found themselves out of a job who are looking for alternative solutions for making a living. And of course there are plenty of other opportunistic entrepreneurs out there. This is good news for you. “True, lack of credit is a problem right now,” said Simmons. “But if you offer seller financing, that doesn’t have to stand in your way.”
Here’s how it works: The buyer makes a down payment to you, the seller, of between 30 to 40 percent of the business’s value, and then over several years he pays you the rest with interest. Or you can set up financing that is all due and payable after three years if amortized for five or, perhaps, seven. It’s a great way to keep the banks out of the deal altogether.
• Start assembling your valuation dream team. You will need a good accountant to help you reconstruct your financial statements into EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). You’ll also need a banker (to qualify the business sale proposition before it is made available) and a lawyer (to create a contract that effectively communicates your interests to a buyer). You may be surprised to learn that you don’t necessarily need a business broker.
Simmons encourages service business owners to take these steps to improve and identify value. Then you can approach the bargaining table with low uncertainty and a legitimate, documented measurement of business value – especially for those intangibles.
“Don’t fall into the trap so many people fall into, by which I mean relying on Rules of Thumb like ‘X times Revenue,'” he says. “There is enough money involved in determining business value that errors of a small percent can add up to thousands of dollars. Guess too low and you’ll lose money when your business sells. Guess too high and you’ll lose money because the business will never sell and will eventually close.
“You must create an attractive offering, especially in this economy,” he added. “Ultimately, the real secret to selling a business of any type is sparking lots of inquiries. Without inquiries, it’s difficult or maybe even impossible to sell. With lots of them, selling is easy.”
Chad Simmons is an expert on small business valuation. He teaches what he does and does what he teaches – a symbol of today’s entrepreneur. Chad gained national standing in his franchise company selling small businesses. He rose through the ranks to become the company’s president and a principal stockholder. His company was America’s largest country real estate franchiser. In addition to rural property sales, the company sold $40 to $50 million of small businesses and commercial properties each year. Afterward, he wrote the Business Valuation Bluebook, describing his small business valuation techniques.
Business Valuation Bluebook, 4thEdition: How Successful Entrepreneurs Price, Buy, Sell and Trade Businesses (Facts on Demand Press, 2009, ISBN: 978-18891505-5-0, $25.95) is available at bookstores nationwide and from major online booksellers.