World Class Mergers & Acquisitions  |  For Companies $5 Million to $100 Million in Revenue


Many owners of privately held businesses have 70% of 90% of their personal net worth tied up in – or pledged as personal guarantees for – their business, but don’t have a clear idea of what steps they can take to maximize the market value of his/her business when it comes time to sell.  Based on our experience in working with such business owners, here are some concrete suggestions.

  1. Optimize Cash Flow

It probably comes as no surprise that the primary driver in determining the value of any ongoing business is its provable cash flow.  Cash is the lifeblood of any business and the more successful a business has been at generating cash, the more valuable it will be to any buyer.  Cash flow can be increased by (a) Increasing Sales, (b) Decreasing Costs, or (c) a combination of both.

Also, a savvy buyer will almost always ask a prospective seller, what his/her ideas are on how to continue growing the cash flow of his/her business.  You will want to consider your answer to this question very carefully.  A business without any growth prospects is not worth as much as one that has immediate growth opportunities.  On the other hand, if the opportunities are that obvious, and that immediate, a savvy buyer will want to know why you haven’t pursued these opportunities already.

  1. Separate and Optimize Real Estate

If you lease the commercial real estate your business operates from, this might be a good time to re-negotiate a lower lease rate in exchange for a longer lease term.  Also, consider negotiating several short options to renew your lease so that the total term equals or exceeds ten years.  Most commercial lenders will cap the buyer’s loan term at ten years, or the maximum remaining term of the lease.  Having ten years to pay it off makes the monthly payment that much more affordable for the buyer.

If you own the real estate inside your business, this would be a good time to separate the real estate into a separate entity still owned by you, and have the business pay fair market rent to the new entity.  Since the current selling price multiple for $100,000 of business cash flow is ~3-5x, the multiple for the same amount of net operating income from real estate is ~10-12 times.  Thus, while this will lower the business’ cash flow, and the business’ selling price, it will substantially raise the combined value.

Separating the real estate and offering the business for sale with the option of either renting or acquiring the real estate will also substantially increase the pool of buyers who might be interested in your business.

3. Favorable Sales & Profit Trends

Buying a business is a lot like buying any other investment, such as stocks or real estate: Everyone wants to buy it when it appears to be going up, and some will even pay a small premium based on this future growth potential.  Conversely, few people want to buy stocks or real estate when it appears to be falling, and/or will discount it heavily based on its perceived future decline.

  1. Defensible Niche

Ideally, there should be good reasons why your customers do business with you that would be difficult, if not impossible for your competitors to ever match.   When the barriers to competitive entry are perceived to be very high, buyers will pay a premium price.

  1. Lack of Customer Concentration

When the loss of any one customer would not have a material effect on the business, buyers will pay a premium.  Conversely, when one or a very few customers represent 25% – 50% – 80% of a company’s business, this can be a deal killer for many buyers and their lenders.

  1. Strong Management Team; Near-Absentee Owner

A new buyer will likely not know everything there is to know about your business, and will look at the strength of the current management team to see if they can be counted on to help him/her manage the business once the current owner departs.  This is especially true when it comes to customer relationships.  How likely is it that some/many current customers will quit doing business with the company once the current owner leaves?  A Seller who fails to develop his/her management team, and insists on doing everything him/her-self, and appears to be indispensable, may optimize the business’ cash flow in the short term, but at the same time may make his/her business unsalable.

  1. Clean Books & Records

There was a time when buyers and lenders would accept the seller’s list of add backs almost regardless of how lengthy or convoluted, so long as they were well documented.  Today, buyers and lenders are much more critical and selective, and sellers would be well advised to begin cleaning up their books, records and add backs a couple of years in advance of the date they would ideally like to sell, so the years that will receive the most attention will be reasonably clean.

  1. Current AR’s, AP’s & Inventory

Bottom Line: Buyers will not pay full price for past due receivables, or last season’s inventory.  All businesses would do better if they kept their receivable, payables and inventory current.  If your business has any of these issues, you would do well to convert their out-of-date inventory and receivables to as much cash as possible prior to putting your business on the market, and certainly before closing.

  1. Anticipate & Prepare for Buyer’s Due Diligence

Most of my selling clients tell me that the due diligence phase of selling their business was the most nerve racking and upsetting to them, because of the potential of turning up something that might scuttle the whole.  A good bit of this can be minimized with proper planning.   By anticipating what questions the buyer will have and what documents he/she will want to review, and gathering and screening these items in advance, a lot of the suspense and mystery can be minimized/eliminated.

  1. Create and Distribute an Employee Handbook

If you don’t have one already, create an Employee Handbook which can be distributed to every employee and all new employees when hired which covers company policies to meet regulatory requirements regarding harassment complaints, family medical leave, military leave, equal employment opportunities, fair labor standards, accommodations for those with disabilities, etc., as well as employee benefits, such paid time off for vacations and holidays, health insurance, retirement benefits and possible match, continuing education, etc.

To make certain your handbook is up-to-date, and compliant with all regulatory requirements, it should be reviewed by competent legal counsel.  This will likely save you a lot of grief in the daily operation of your business, but it will also increase the value of your business in the eyes of a potential buyer.

  1. Create Standard Operating Procedures Manuals

If you haven’t already, document step-by-step the best practice for every step in your company’s process, from receiving and inputting an order, producing the order, shipping/delivering the order, billing the order, and getting paid.  If properly implemented, these standard operating procedures will assure that every employee is using best practices to process and fulfill every order.  This exercise frequently uncovers inefficiencies and inconsistencies that can be easily remedied and lead to improved company performance in the current period, but the existence of strong system of standard operating procedures will also increase the value of your business in the eyes of a potential buyer.

12. Create Non-Compete Agreements for your Key Employees

Clearly the prospect of having a key employee or employees leave immediately after the business is acquired, and take customers, trade secrets, and other key employees with them will be a serious deterrent to a potential buyer.  Conversely, acquiring a business where all of the key employees are bound by an enforceable non-compete agreement can be a real plus.  Drafting and obtaining an enforceable non-compete agreements from long-term employees can be challenging, and a business owner is well advised to seek competent legal counsel.

  1. Be Prepared to Hang a Lantern on Your Problem

No business is completely flawless, but the mistake many business owners make is assuming that if they hide their flaws perhaps the buyer won’t discover or notice them.  This almost never happens, and when the buyer suspects that he/she was deliberately deceived, this can undo months of confidence and rapport building between the seller and the buyer.  It frequently leads to an 11th hour reduction in the buyer’s offer, and not infrequently kills the whole deal.

In my experience, a much better approach is to take charge of the disclosure of these aspects of your business right up front, or at least very early in the process.  Several advantages accrue to the seller when you do it this way.  First, right out of the gate you establish a reputation of being a straight shooter who has nothing to hide.  Second, you control the news, and have an opportunity to put it in perspective, and explain what steps you’re already taking to remedy/minimize it.  For example, “Yes, it true when I started the company that I sold and serviced most of our current, larger accounts myself.  However, three years ago I hired my VP of Sales and started taking more time off.  Now when our customers want/need something now, they call him.”

  1. For the Right Buyer, Be Prepared to Carry Some Seller Financing

Almost without exception, sellers would prefer to get 100% cash up front when they sell their business.  In my experience, however, when a seller insists upon those terms, it tends to make both the buyer and the lender needlessly wary, sometimes to the point of negotiating a deeper discount to the asking price.  Even before the financial market meltdown of late last year, many SBA lenders were requiring the seller to carry at least 10% of the purchase price in a seller’s note.  When you’re reasonably confident that you’ve met the right buyer for your business, you might seriously consider carrying some seller financing as a sure-fire way to lubricate any bank financing.  After all, aren’t you more likely to come out ahead if you get 100% of your asking price with 90% cash at closing PLUS a 10% seller’s note, vs 100% cash at closing but only 90% of your asking price?

  1. Last, but not least, Clean, Well-Ordered Workplace

This last point may seem trivial and unimportant, or it may seem so obvious as to go without saying; however, in my experience there’s no denying the positive impact that a clean, well ordered workplace has on a buyer.   First, it creates/promotes an environment of pride, quality and efficiency.  Second, it creates floor space/ counterspace/ storage space which translates to more capacity.   Lastly, all other things being equal, what owner or employee wouldn’t prefer to come to work in a clean, well-ordered workplace?

If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a complimentary, confidential, consultation with us, have them contact me at

Mike Ertel, CBI, M&AMI, CM&AA
Managing Director
Transworld M&A Advisors
813.299.7862 Direct

©2021 J. Michael Ertel PA