What is the No. 1 thing I should do before trying to sell my company and why?
The following answers are provided by members of Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
1. Build a Data Room
Get ahead by preparing documentation in a data room. A data room is a web-based repository of critical documents such as financial statements, legal and employee agreements and your business plan. Rooms range at the high end from Merrill, at mid-market from ShareVault, but you can get started with Box or Google Drive.
2. Go Through a Mock Due Diligence Process
Work with an attorney who is familiar with the process of purchasing and selling businesses to make sure that all of your legal ducks are in a row before wooing potential purchasers. It is much better to make sure all of your legal check boxes are marked before engaging with a potential purchaser than to have to scramble to get everything in order once you have found an ideal purchaser.
3. Prove Zero Risk
Pretty simple: if you can PROVE to someone that they won’t lose money, you can sell anything. This is a combination of financial reports, organizational structure, operating procedures, controlled user acquisition sources and proven, repeatable monetization. It always comes down to perceived and provable risk tolerance.
4. Have a Game Plan for After You Sell
You should clearly define your goals after selling the company. If you want to start a new company, make sure to do the ground work before selling your current venture. If you’re going to retire, make sure you have enough money. Don’t get in a situation where you would not have much after exit. Don’t have a “will-figure-it-out-later” attitude. Planning ahead is always good.
5. Make Sure the Paperwork Is in Order
One of the most costly aspects of selling a business is the due diligence process. Make sure all of your client contracts and paperwork is buttoned up. The buyers will decrease the value of your business if there are holes in the operation or potential liability due to an incomplete filing system.
6. Remove Yourself
If you want to sell your company for a high valuation, you must be able to remove yourself. You don’t want to sell and then have to stay onboard for three to five years. Start hiring people to take over your position or delegate down to your current employees.
7. Cut the Fat
Having sold one of my previous companies to eBay Enterprise, I can tell you that one of the best things you can do prior to selling is cut the fat. The valuation of your business will depend largely on how profitable it is during the negotiation that takes place prior to earning a term sheet and entering due diligence. Cut needless expenses, poor performing employees, and get your books in shape.
8. Understand Your Valuation
Before you attempt to seek out acquisitions, you should have an understanding of your valuation. This would include potential value, expenses, sales per year and even physical assets help determine what it should be sold for. Collectively, once you add up everything, you can analyze what your company is worth to you. This is important to know so you can shoot for your target sale price.
9. Write Down Your Systems
Chances are you already have processes for the way you and your team work on everything from advertising to payroll. Get these systems written down in a format that can be transferred in a sale (like a company wiki or operations manual). There’s inherent value in buying a company with replicable success, especially if key team members transition during the sale.
10. Hire a Great CFO
You need someone in-house and fully committed to your company to really take a deep dive into your financials. Having these organized in a manner that’s advantageous to the business is key to getting the deal you want.