Eight Ways to Prep Small Business for Sale

By Sharon McLoone

NEW YORK ( TheStreet) -- There are a lot of reasons small businesses go up for sale. It could be something as simple as owner boredom or burnout, something serious like death or divorce or something common like a serial entrepreneur who's ready to skydive into the next endeavor.

Once a business owner is ready to proceed and is committed to relinquishing ownership, there are basic steps and fine-tuning to be done in order to get the best price.

Most experts recommend that a seller have a two- to three-year window to prepare for selling a business. It's imperative that a healthy business for sale has respectable revenue and profitability, says Don Naideck, president of North Bethesda, Md.-based Prime Investments, a seller of firms valued between $500,000 and $25 million in the Mid-Atlantic area.

It's also important to attract more than one buyer, says Marian Cook, president of Ageos, a consultancy in Wheaton, Ill., that prepares firms for sale and helps with the transition. "Having only one bid is the same as having none. You don't know if you're getting the best deal."

Here are eight tips to review if you're thinking of selling your business:

Keep it confidential: Naideck recommends that the process of selling is kept absolutely confidential from employees, as hard as that may be sometimes. "If you think you have a sale and it falls apart, everyone knows you want to sell," he says. Employees are likely to start looking for other jobs. If word gets out in the marketplace, competitors can sell against that and suppliers may put you on cash on delivery.

Gather competitive intelligence: Be aware of what competitors are doing so you can show potential buyers that your firm knows the market. "Read competitors' press releases and know who they're making strategic alliances with," Cook says. A potential buyer wants to know why your business is different from competitors and that it remains a player in the market.

Consider future growth: A buyer typically wants to buy a business because he believes he can improve it and make it bigger, Naideck says. The seller should think about plans to grow the firm and have an answer as to why he hasn't done it. "They'll pay you for what you've achieved but they don't want to buy a business that doesn't have potential," Naideck says.

Improve curb appeal: Make sure your online curb appeal is strong. People should Google their company and ask themselves if they like what they see, Cook says. Curb appeal also can mean sprucing up the physical office space.

Deal with administrative issues: Make sure human-resources policies and procedural manuals are updated, define employee roles and show their value. A small-business owner may have offered an employee a raise but never documented it. "When the owner leaves the company, Tim isn't going to be too happy trying to explain why he deserves a new salary," Cook says. It's important to have updated technologies in accounting and inventory management.

Diversify your supplier base: Many small firms do business on a handshake, and a supplier relationship can get overly cozy. "A small-business owner may think 'I've always bought my widgets from Jane,' but that collegiality can cause laxness in the competitiveness of a supplier," Cook says. See if you can get other, more competitive bids and make sure you have legal documentation.

Diversify your client base: Buyers will shy away from businesses they perceive to be risky. A big issue Prime Investments sees time and again is customer concentration. "If you're doing $5 million a year but $2.5 million with just one client, a buyer will be wary," Naideck says. Reduce any customer concentration above 30% and get as broad a customer base as possible.

Understand the value of institutional knowledge: Ensure that there will be some degree of management who knows the industry. "Make sure to lessen the risk of a buyer coming in and messing things up," Naideck says. Buyers may bring in their own people but typically they recognize the real value of the business is customer relationships. While there's often a perception that a new person is going to come in and clean house, it's usually the buyer who is nervous that employees will leave.

Naideck recommends the owner stay with the business for two months to a year after the sale. It's also not unusual for the seller to stay on as an employee at the company. "Sometimes sellers are overwhelmed by the business and want to do sales instead of managing people" at the company, he says.

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