Latest / The SmallBizChat with Melinda Emerson / What You Need To Know If You Want To Sell Your Business with Melinda Emerson

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What You Need To Know If You Want To Sell Your Business with Melinda Emerson · The SmallBizChat with Melinda Emerson

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Three, two, one, zero.
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Ignition.
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Lift off.
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Ending small business failure.
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Welcome to the Small Biz Chat podcast with the number one small business expert, Melinda
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Emerson.
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Melinda's goal is to end small business failure, and she'll give you the information
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you need to succeed and live the life you dream of.
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Now here's your host, the small biz chat lady herself, Melinda Emerson.
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Have you subscribed to the small biz chat podcast?
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Well, it's time.
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Every Wednesday, we offer listeners bite sized actionable tips to start and grow a successful
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small business.
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In just twenty minutes or so a week, you can get a ton of insight and resources to propel
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your business forward.
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Be sure to subscribe to the Small Bitch Chat podcast today.
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Hi, everybody.
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This is Melinda Emerson, the small business lady, America's number one small business
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expert.
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And I am so excited to welcome you to another episode of the Small Biz Chat podcast.
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Now today's podcast is a solo episode where I'm going to be talking to you about what you need
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to know if you want to sell your business someday.
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Now listen, before we get into it, if you are a fan of the Small Bitch Chat podcast, I would
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love it if you left us a positive review on Apple Podcasts or wherever you listen to your
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favorite podcast.
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Listen, please don't leave me any hate mail.
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I only need positive reviews.
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I would also appreciate it if you would share our link with a small business owner that you
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know could benefit from this valuable information.
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Now, today's episode topic came about because one of the things that I've been really excited
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about this year is we've expanded our company into mergers and acquisitions strategy this
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year.
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And I'm really passionate about helping successful entrepreneurs secure strong exits
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and then set them up with their next act.
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And so we've moved into helping people exit, helping people buy existing businesses, helping
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people buy franchises.
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That is another service that we're now providing at Small Biz Lady Enterprises.
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I'm so excited that we have moved into this area.
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For years I've been coaching people around it, but it's time for me to get public out here and
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let you guys know that this is something that I have begun to do.
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It's not all that I do, but it's something that I'm really excited about this year.
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So today's episode is for those who want to build something that lasts and pays when it's
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time to move on from their business.
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And if you've ever wondered whether your company could run without you or how to turn
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your years of sweat into a clean profitable exit, you are in the right place because that
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is what our topic is today.
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I want to talk about what every small business owner needs to know if they plan to sell their
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business someday.
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And so what we're going to talk about is timeline, your financial housekeeping, we're
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going talk about the peoples and systems that you need to have in place, and also what the
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buyer sees that is reliable rather than risk.
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And this is really going to be a practical, no fluff conversation that you're gonna be left
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with action items to get started today.
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And you know that's my promise always.
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We give actionable advice on the Small Biz Chat podcast.
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You know our mission is to end small business failure and today is no different.
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So the first thing I wanna do is just really tell you that over the next couple of minutes,
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what we're gonna talk about are sort of the five big questions that you need to ask
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yourself.
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And the first one really starts with, can your business really run without you?
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Are your financials audit ready?
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Is your revenue diverse and predictable?
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Do you have leaders in your business who can scale?
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And is your legal and operational house in order?
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And really, we are going to start with step one, which is really where you need to be
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thinking about from a timeline standpoint.
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It's my best advice I can give you is that typically people plan their exit two to three
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years before they actually do it.
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And it's not too much to say ten years before you do it, but bare minimum, twenty four to
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thirty six months is ideal for you to build what we call your roadmap so that you can
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prioritize your high impact wins that are just really gonna increase the value and reduce
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buyer friction.
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And really they're gonna increase the number you can charge someone to buy your business.
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And this is valuable whether you're aiming for a strategic sale, or if you're gonna do an ESOP
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and sell your business to your employees, or if you're going to do a management buyout, if
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there's a key person in your business that you think can buy the business.
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All of what we're going to be talking about today is really going to give you your
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checklist, the mindset, and really the practical steps that you need to make so that
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you can be ready to sell your business.
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And what I want you to do is just stick around to the end of this episode.
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I'm going to share real examples because my goal here really is to give people clarity and
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control.
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So let's jump into it.
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First of all, let's talk about timing and then let's talk about mindset.
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As I said earlier, it's not too early, three years before you're gonna sell is not too early
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to really decide what your target exit date is.
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And really just understand this, selling a business is a process.
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And so by planning, it gives you the opportunity to improve your financials, to
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tighten operations, to document your systems, and to really build buyer confidence.
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This stuff takes time because the main thing you wanna prove at the end of the day is that
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your business is a standalone entity that can run with or without you.
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But the first thing you gotta do before you get into any of that is decide what your goals are.
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And when I say your goals, I'm talking about what is the dollar figure after taxes and
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everybody else is paid that you wanna put in your pocket?
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What is your maximum price?
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What is your minimum price if you get yourself in a situation that you gotta do a quick sale?
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Some of you business owners that are out here that are married, if you guys get divorced,
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your spouse could trigger a sale of your business and you've gotta figure out, it's
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gonna be a fire sale, but you at least wanna be set up for that if you know it's gonna happen.
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Or if you know you're the person about to file for divorce, this is stuff you need to be
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thinking about and planning for.
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And then you've gotta think about what kind of legacy do you wanna leave?
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If you do leave, what kind of employee continuity plan you wanna put in place?
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Some businesses when they sell, they dictate that the employees have to stay employed for at
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least two years or three years after the sale.
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Are you gonna do an earnout?
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And let me explain what an earnout is.
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An earnout is where the business owner gets cash as well as paid over time.
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And the reason why it could benefit you to do an earnout is because it's a lower tax
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liability for the sale.
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And it also helps the seller.
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For example, if you want to sell your business to one of your key employees who doesn't happen
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to be worth $3,000,000 liquid, you can help them buy the business by doing an earn out.
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Now an earn out is not like you don't get some money.
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Most earn outs are the business owner might get 50% of what they ask for.
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So if you're selling your business for a million dollars, you will get $500,000 cash and
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then the rest will be paid over eighteen months or something like that with a monthly payment
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paid out.
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Basically it's considered like partial liquidity, but your strategy really depends on
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all of these priorities.
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So you've gotta figure it out.
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Like what is the amount of money you have to make after the sale and everyone is paid?
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Because remember, there's a lot of people who are gonna have, there's any debt on the
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business that comes off the top.
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The business broker that helps you handle the sale, they get a percentage of the sale and
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that can be anywhere from one to 10% depending on how big the sale is.
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You may have a buyer's agent that helped So there's people that are going to have to be
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paid, the lawyers that you're using, that kind of stuff.
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A lot of people are gonna have to be paid out of this money.
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So you've gotta figure out what you have to have in order to feel whole and feel happy.
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And the reason why all of this, I mean, I guess, and after you make those decisions about
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what you want, then these five key questions that I want you to think about start with,
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number one, can your business run without you?
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And why does this matters?
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Buyers are really value transferable, repeatable business that doesn't rely on a
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single founder.
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And what you have to do as the business owner is really yourself up to work yourself out of a
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job.
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You need to replace your own role in the company.
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And that is hard, but you need to think about all the things you do, make a list of all the
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things you do, and you need to delegate some of your authority to someone else in the company,
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and you need to hire someone else to be a chief leader in the business other than you.
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That's the only way you're gonna get out.
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I think there's two key tests that I like to tell people to do.
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Number one, can you take a two week vacation where you tell people not to contact you?
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Unless the business is burning to the ground, nobody's allowed to contact you.
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Can you do it for two weeks?
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Okay, and if you're nodding your head like, Oh, I've gone on a two week vacation before.
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Yeah, really?
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Have you gone on a laptop free vacation?
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That's what I'm talking about when I say two week vacation.
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When you're ready to sell your business, probably a year before you sell your business,
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you need to go on a two or three month vacation where no one contacts you.
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It could even be a staycation, it doesn't matter, but the rule has to be nobody is
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allowed to contact you.
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A two to three month absence is going to tell you a lot about how your business operates.
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And you want to measure revenue before and after you left.
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You want to look at what the client retention was.
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You want to look at what the operations continuity was and how if any issues that rose
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up were resolved.
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That is going to tell you if you're really ready to walk away from this business.
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The good thing about doing an exercise like this too is once you give power to people in
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your business, it's really hard to take it back.
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And that's a good thing because you want to get down to this magical four hour work week that
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Tim Ferriss talked about so many years ago, that by the way, it was total bull crap when he
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said it, but that's another podcast.
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Anyway, my point is that you've got to work a whole lot of years to get to the point where
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you don't only have to work four hours a week.
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But that should be everyone's goal because you want to transition out of the business before
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you completely sell the business.
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So you've got to delegate decisions right, you've got to hire, you've got to promote a
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COO, a CFO, or even some kind of general manager.
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You want to document the daily and weekly and monthly workflows, and you really wanna create
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what we call escalation protocols.
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And that is who is the next person to call?
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Is it the lawyer?
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Is it the insurance company?
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Who are the people, vendors that you can call to solve real problems if something really
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becomes awry in the business?
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And you wanna have your name not be on that list.
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You wanna build a continuity plan, an escalation plan where you are not involved so
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that you can really see what your team is, they're capable of when you're not there.
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A lot of times as business owners, we create these cultures of you gotta come ask mama or
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you gotta come ask dad what to do.
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No, you gotta hire smart people and empower them to make good decisions on behalf of the
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company.
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You have to incentivize them the right way so that they stay focused on the main thing.
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So that's one thing that I want you to think about is how can you remove yourself from your
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own org chart so that you can get your business ready to sell?
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The second thing I wanna talk to you about is your financials.
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Are your financials accurate?
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Are they clean?
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And are they compelling?
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That's really, really important.
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I mean, it's one thing to get your taxes done every year, that's great.
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But when it comes to selling a business, audited financial statements make a lot bigger
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statement than, oh, we do our QuickBooks in house kind of thing.
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No, you need to make sure that all of your information is clean.
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And the best way to do that is with a fractional CFO or with a staff CFO.
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You want to make sure that you're not just letting all of your finances be handled by your
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tax preparer.
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Somebody needs to be strategically looking at your finances, looking at debt, looking at how
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this business is going to look to a buyer, and that's not something a tax preparer can do.
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Now, sometimes your tax preparer is a CPA and depending on how their practice runs, you
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should be using them as a business advisor to your business.
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But you want to have somebody be able to look at your books.
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Books that are a mess don't get purchased, businesses do not get purchased.
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So you want your buyer and your buyer's lender to be able to underwrite the deal based on the
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historic performance and the profit margins of your business.
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And they cannot do that if your books are a hot mess.
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So one of the things you want to do is do you have an accountant who can produce an audited
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or what we call reviewed financial statement?
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Are your revenues and expenses consistently categorized?
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These are two things that are gonna be red flags if your answer is not yes.
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So these are some of the things that you need to be thinking about.
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Some of you guys, again, I hear you use the tax preparers and not CPAs.
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That's a bad idea if your business is over half 1,000,000 to 1,000,000 plus dollars and you
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still got small time people doing your taxes, it's not worth it.
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Especially if you're trying to get ready for a sale.
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You want to make sure that you are standardizing what happens with your books,
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that your books are closed monthly, that there is a monthly reconciliation of your account.
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You wanna make sure that somebody is preparing regular EBITDA adjustments.
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You wanna make sure that that's a regular thing that's done in addition to your taxes, you
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wanna make sure that that is done.
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You also wanna make sure that there is a three year credible forecast that's prepared for your
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business.
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You wanna get your financials prepared, like I said, by a CPA or a CFO.
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And you do wanna get them reviewed and audited if possible because audited statements make a
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statement to the people that are trying to buy your business.
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The next thing I would say that you need to think about is what does your revenue look
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like?
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Do you have predictable, diversified revenue and defendable margins?
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And why this is important is because buyers pay premiums for recurring revenue and they want
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you to have a diverse customer base.
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They don't want you to have a huge client that if they went away, the business would go away.
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So it's very important that you have lots of different types of customers and at healthy
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margins.
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So you wanna make sure that your top customers are not more than 10% of your revenue.
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So that's called a calculate your concentration risk.
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You also wanna look at what your churn rates are, what your customer lifetime values are,
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and really what your gross margin trend is.
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Is your business growing margin year after year, or has your margin been eroded by gas
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prices, shipping prices, whatever, by tariffs?
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You really need to understand where your business is in terms of other businesses like
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yours.
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And so that's another function of your CPA, CFO can be helping you look at this stuff so that
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if your margins are too high and you have one customer that's worth 50% of your revenue, you
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know there's something, you gotta do something about that.
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Two years, three years is a good amount of time to do it.
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One year is harder, it can be done, but you just have to understand, particularly if you're
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a professional service business, this stuff is really, really critical.
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The more things like this that are not right, the more your business will get discounted in
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terms of the number that you'll get offered for it.
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And so you wanna make sure that you're reducing your customer concentration.
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If you can, you wanna increase your contract length, go from a project based business to
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having long term contracts.
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You want to improve your pricing.
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You should be increasing your pricing numbers every year so that your margins will grow as
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your expenses grow.
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And you want to document your scalable sales and marketing processes.
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It's really important that you have a way to predict leads and how many sales discovery
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calls are done every week and thus how many things are closed.
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You really want to understand what your close ratio is and demonstrate the sales function in
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your business because that's what these people are buying when they're buying your business.
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So if all of your sales are based on your personal relationships, that is a super loud
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red flag that this business can't run without you.
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I would also say you've gotta look at your people, your culture and your leadership in
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your business to make sure that your business is ready to scale without you.
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And so what does that mean?
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You wanna make sure that you've got a strong leadership team other than you.
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Talent risk greatly depresses business valuation.
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And so you wanna make sure that you can assure the new buyer that your teams will stay and
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that they will perform well post sale.
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And the only way you can do that is with great training.
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You wanna make sure that you have key employees that are running their specific area of the
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company, and you wanna be able to explain any retention risks or any key person dependencies.
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Obviously you don't want the business to be determined by you, but you also don't want the
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business to be run by some 800 crown gorilla salesperson that is threatening to leave every
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other week and can put the whole company in peril.
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You don't want that either.
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So you wanna make sure that the risk is spread around and that your key employees are happy
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and they've been with you at least two years.
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You wanna demonstrate maybe that you have employment contracts with key employees, those
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kinds of things.
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So you wanna implement retention bonus packages.
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You want to help the new buyer understand what your succession plans were.
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You wanna make sure that you have clearly documented job descriptions and performance
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metrics, and that you have an ongoing leadership development program within your
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business.
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You do not wanna just train people the day they get employed, the month they get employed.
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You wanna have quarterly, at least once or twice a year training for the whole team.
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And the people that you see that are potential senior leaders in the business, you wanna make
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sure that you're doing some internal or external leadership development that you're
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paying for.
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Maybe you're paying for a coach or something to work with your new COO to get them up to speed.
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That's an investment worth making.
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You also have to look at your operations, your IP, your contracts, and make sure that your
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legal housekeeping is in order.
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Often due diligence uncovers corporate legal and operational risks that can kill or reduce
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deals.
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For example, making sure you have up to date trademarks on key IP in the business.
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Do you have executed client contracts or after the first two years you operate on a handshake
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with your suppliers, with your customers.
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Do you have supplier agreements in place?
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Or again, you might've had a contract agreement the first year, but now you've been in business
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twenty years.
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You've been working with the same people and now you don't have a current contract
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agreement, making sure that all of your IP is organized with one lawyer or law firm managing
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it so that all of that content, lease or license kind of things can be signed over.
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And then do you have a compliant HR policy?
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All of this stuff is stuff that needs to be handled because people want to buy your
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business and know that your business runs well.
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If your business is run well and you have positive cash flow, you can get a serious fee
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for it.
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But if it's not, you really could mess around and kind of have a mess and that's not what
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anybody's interested in.
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So you wanna make sure that you have a centralized place where contracts are held.
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You wanna ensure that all of the intellectual property of the business is owned and or
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assigned.
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You want to have updated employee agreements and really you want to have good contract
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agreements with your independent contractors, your vendors.
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You want to fix any outstanding legal issues or regulatory issues.
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And really what you want to prepare is what we call a due diligence data room so that when
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someone comes and they want to invest in your business or buy your business, that you have
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all of these documents ready to go, that it's not an exercise for you to have to produce
23:43
them.
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And so it's really important if you are thinking about selling your business one day,
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even if that's not one day soon, all of these things that I have talked about today are
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things that you need to think about.
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So you're going to need playbooks, you're going to need operations manuals, you're going to
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need an LMS that you use for training.
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You're going to have to have your KPIs and dashboards and standardize the monthly metrics
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for them.
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You're definitely gonna have to clean up your financials, your balance sheet.
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You're gonna have to reduce any unnecessary debt.
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And you're gonna have to straighten out like owner draws and stuff like all the stuff you're
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running through your business, you had to cut some of that out because all of that's gonna
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take away revenue from the company.
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So you wanna formalize any transactions that are directly involved with the company, and you
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wanna just make sure that your books look really, really good.
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If you take all the money out of the business, a year before you wanna sell the business,
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you're not gonna have anything to sell.
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So it's really important that you time your draws and make sure that you're not, I know a
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lot of times business owners take money out of the business because they're trying to reduce
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taxes.
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But if you take all the money out of the business, you're gonna look like you don't
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really have a business and that's not what you want.
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So you wanna make sure that you counsel, you consult with tax counselors so that you can
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optimize your after tax proceeds and your sales structure, assets versus stock versus earn out,
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you really wanna understand and make sure that you have some tax strategy stuff in place
25:34
before the sale.
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Because I've seen people sell a business for $30,000,000 and have to give 10,000,000 to the
25:40
government in taxes.
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That's not something that you want.
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You wanna strategize with that.
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And there are lots of great wealth advisors and stuff that specialize in working with small
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businesses that can help you with this kind of stuff.
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And you just wanna make sure that you have a clean valuation before you start talking to
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anybody about buying your business.
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If they pay for the valuation, they're gonna deduct that from the price that they pay you.
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So you want to get with a firm that can do a professional evaluation for you.
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And typically as a small business, someone under 2,000,000, 3,000,000 in revenue, you can
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get a valuation done for 5,000 thousand dollars dollars to $7,500 So pay the money to get a
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proper valuation because that gives you a position of strength to really understand what
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your business is worth.
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And often it'll also kind of illuminate the things that you need to tighten up and fix.
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And then just figure out what your exit option could be.
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Are you gonna sell to a strategic buyer?
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Are you gonna sell to after a private equity buyer?
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Are you gonna let the employees buy the business through an ESOP?
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Or are you gonna sell your business to one of your key employees?
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There's all kinds of ways that you can do this.
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The whole point is you really want to pull together a team of folks that can help you.
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You want to retain certainly a mergers and acquisition advisor, which is what my business
27:13
does now.
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You can also engage a business broker.
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You're definitely going to need a corporate attorney and a CPA and potentially an
27:20
investment banker for larger deals.
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It really just all depends.
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You just wanna make sure that you run an internal due diligence so that you find your
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gaps and fix your gaps.
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And the best way to do that is two to three years before you're going to sell.
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And you wanna figure out what your earn out plan is gonna be.
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And you gotta figure out if a sale happens, how and when are you gonna tell your employees,
27:47
your customers, and your suppliers because the last thing you wanna do is destabilize your
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business.
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So I would say just to wrap this up, is you wanna begin with a ninety day plan, right?
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You wanna kinda pick your three high impact priorities, whether that's gonna be cleaning up
28:05
your financials, documenting your SOPs, or reducing your top customer concentration.
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Those are potential top threes.
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There could be different ones.
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But these are things that you're going to reassess quarterly and adjust.
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Selling a business is as much about reducing risk as it is about growing revenue.
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And so you want to make sure that your buyers pay for predictability and scalability.
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And so that's really what you want to offer them.
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And if you take the time to clean up stuff before you sell, you're going to get a better
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price.
28:46
You have to do all this work to get into business.
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Well, what?
28:49
You have to do a bunch of work to exit your business as well.
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But I want everybody to exit rich.
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That is what I want for you.
28:58
If you take this sage advice, you should be good to go.
29:02
And certainly if you need help, like if I just made your head hurt with everything that I've
29:07
talked about, please just reach out to me.
29:10
I am easy to find on LinkedIn, or if you want to just send me an email at
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melyndasmallbizladyuniversity dot com.
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I just want to support you and have you, if you think that you have a business that you can
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sell one day, these are the things that you need to tighten up.
29:27
Lessons are always lessons, right?
29:30
Some lessons just get to be more expensive than others.
29:33
So what that means is that you never lose in business, either you win or you learn.
29:38
All right, God bless everybody.
29:42
Thanks for listening to the Small Biz Chat podcast with Melinda Emerson.
29:47
Subscribe to this podcast wherever you listen to podcasts and join us next Wednesday for more
29:53
fantastic information and interviews.
29:55
You can find more sources and small business success strategies by visiting Melinda's
30:00
website, succeedasyourownboss.com.
30:03
Thanks again for listening, and we'll see you next week.