Can you handle the truth? Of course you can - if you really want to sell your business!

I'm still amazed at how many business owners do not understand the importance of knowing the "realistic" value of their business before they decide to sell their company. In this "breakthrough business strategy," my goal is to help you understand how going to market with a realistic price and realistic expectations is essential to your transition success.

Recently, my partner and I met with a business owner who is having health issues and is in a situation where he needs to sell soon. Before contacting us, this seller tried to sell his business through his CPA and didn't find any takers.

The seller was asking too much! Unfortunately, we see this scenario all too often. In this case, his CPA became so frustrated with the situation that he recommended the seller contact us.

Before doing so, the seller hired a third party valuation company to value his company. Great, we thought! Finally, a business owner who understands the importance of getting a valuation before going to market!

You Want the Truth? You Can't Handle the Truth!

Unfortunately, this business owner couldn't handle the truth - his business wasn't worth as much as he needed it to be worth. As it turned out, he coerced the valuation company to come up with a valuation that was closer to his expectation. The valuation analyst (not one we recommend) concocted a ridiculous formula to project revenues for the balance of the year. He eliminated several months of weak earnings and projected revenues using inflated revenue figures.

Like a peacock with fluffed up feathers, the business owner proudly presented the valuation to us. He wanted us to take his company to market using a figure that was higher than the inflated valuation figure. Thanks, but no thanks! Who is this business owner trying to fool? He may fool another intermediary who is a shark and hungry for listings. He may fool an inexperienced and naïve buyer. He definitely won't fool a lender - especially after the recent mortgage debacle!

Lenders Will Find the Truth

Here's the bottom line. Lenders are risk adverse. Underwriters are responsible for determining the value of the business based on the ability of the business to generate enough profits to repay the loan. Therefore, they analyze only historical data, not projections. Projections can't be proven, and therefore, represent risk to the lender.

Also included in the analysis of the underwriter, is the ability of the buyer to repay the loan, in the form of collateral, if the business goes south. Simply said, lenders will not grant a loan for a business if the all of the numbers don't compute. If there's an SBA loan guarantee involved, you can count on extremely close scrutiny - no ifs, ands or buts about it!

I continually hear horror stories from lenders who turn down loans because a business intermediary has either valued the company too high or didn't value the company at all and listed the business for a "pie-in-the-sky" amount that the business owner or, worse, the valuation company invented.

This practice really makes me want to get on the phone and ask the intermediary: "What were you thinking?" What a disservice to everyone involved! No wonder 9 out of 10 small businesses on the market any given day will never sell! Be sure to work with an advisor who fully understands transactions, exit planning and valuations and can help you determine the market value of the company and the tax liability. This must be completed before you go to market.

As a seller, what can you do to protect yourself from this happening to you?

1. Determine Your Exit Goals. Whether you are selling your company this year or ten years from now, the best time to plan your exit is today. Not tomorrow. TODAY! Begin by determining how much you need to net, after taxes, from the sale of your business in order to leave your business in the style you want and deserve.

2. Get a Valuation of Your Business Today. All too often sellers wake up one day and say "Enough is enough!" They are burned out or they are having health issues! For those reasons, and others, business owners should always know the value of their business.

Hire an experienced and unbiased valuation analyst to conduct a third party valuation. A well-trained business intermediary will offer this service. Let him or her do their job, without coercion. Leave your emotional baggage behind, be realistic and accept the valuation for what it is - a snapshot in time.

Many business owners think that blood, sweat and tears increases the value of the company. They are mistaken. Other business owners think that a buyer should pay them the money they invested in the business, no matter what the business is generating in income and profits. With all due respect, it doesn't work that way.

As a business owner, you must separate your emotions from the valuation process. Buyers really don't care about your journey. They don't care how much money you've invested. All they care about is how much cash flow will be available after debt service. They are looking for the same thing you are - to have enough money to be able to live in the style they want and deserve.

Sellers must be willing to be objective. Sellers must be willing to put themselves in the shoes of a savvy buyer - one who makes practical business decisions. Now ask yourself: "How much is my business worth?"

3. Determine the Gaps. What's bringing the value of your business down and more importantly, what will increase the value of your business? Although the following list is not all inclusive, these are some of the categories you should focus on to increase the value of your company.

• Financial Strength. Buyers want to buy a company that is growing and profitable. The buyer has to be able to cash flow the business after debt service and capital expenditures. The lender's focus their analysis here and will dictate the real value of the business.
• Owner Importance. Do you as the owner own the customer relationships? If so, you need to transfer those relationships to someone else in the company before you sell.
• Labor. There are many factors to review as far as labor is concerned. Buyers will want key employees to stay, but sellers can't expect the buyer to guarantee job security. How difficult is it to find qualified employees? What's the benefits package and are there any significant salary increases due to employees?
• Diversity and Stability of Customers. How many active customers are there? Will they stay with the new owner? What's the customer concentration? What will happen if the company loses one or two key accounts? How long have the customers been purchasing from your company? Are you providing products or services to customers that are not profitable?
• Vendors. Are there any exclusive relationships? Will they stay with the new owner? Are there contracts in place? Are they transferable?
• Repeatable Systems and Processes. The efficiency of your business has a great influence on profitability. The more profitable you are the more money you will collect at the closing table.
• Competition. How strong is your competition? Are technological changes going to give a major competitor with more cash a significant advantage?
• Facilities and Location. Will the buyer lease or buy the building? What's the length of the lease? Is it transferable? Are there any changes in the area that will affect the location (negatively or positively)?
• Future Outlook. Does the business have the potential to grow in the future or is the buyer buying a buggy whip manufacturer?

4. Develop an Action Plan. Prioritize the categories you have identified in the last step and develop a detailed action plan to improve your business. Be sure to include deadlines. Consider the rewards you will reap when you sell your business for the amount of money you need or want. Are there obstacles that will get in your way? Write them down and develop solutions and action steps to knock them down - one by one. Review and adjust your plan regularly.

5. Take Action! With your action plan in hand, you must take action. This is the only way you will be able to achieve the goals you established in step one.

If you are like most business owners, your business is probably your most valuable asset. Treat it as such. Follow these steps to increase the value of your business so you can leave it in the style you want and desire, when you want. If one day you wake up and have to sell the business, then you'll be more prepared to get what you need and want.

Whenever you decide to sell, always remember that your expectations need to be in line with the amount of money a buyer is able to finance, when financing is a requirement. It's the bottom line. It's non-negotiable. It's the truth. In the end, this particular business owner couldn't handle the truth. He closed his doors and didn't receive a dime for his business. So the question I have to ask...Can you handle the truth? Of course you can - if you really want to sell your business!

Laura Maver Ward, CBI, CExP, CBC, CMEA, CSBA, CPBA, CPVA, LREB is a Managing Director at MidCap Advisors, a national speaker, author and facilitator. Laura holds certifications in exit planning, business intermediary services, business coaching, machinery and equipment appraisals, business analysis, behavioral and values analysis and is a licensed real estate broker. Laura is passionate about helping business owners and business leaders run their companies, so that they can live today and retire tomorrow in the style they want and deserve. You can reach Laura at (816) 448-3737, via snail mail at MidCap Advisors, Inc., 2300 Main Street, Suite 900, Kansas City, MO 64108 or via email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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