5 Things to Fix Before Selling Your Business

Did you know that over 50% of the money you’ll ever make from your business comes from the day you sell it? In this video, Quiet Light Advisor Ryan Condie breaks down 5 critical things to fix before ever talking to a buyer, so you don’t leave tens or hundreds of thousands of dollars on the table. Learn how accrual accounting, untangling co-mingled LLCs, removing yourself as a single point of failure, tracking add-backs, and making one key supplier cost adjustment can dramatically scale your Seller’s Discretionary Earnings (SDE) and increase your final valuation.

CHAPTERS

00:00 The Biggest Source of Financial Reward

00:45 Is Your Business Scalable?

01:30 The Bookkeeping Trick That Adds $100K

02:15 The LLC Mistake Lenders Hate

03:00 Make Your Business Run Without You

03:45 How Buyers Spot Weak Businesses

04:15 The Supplier Secret That Prints Cash

TRANSCRIPT

00:00 The Biggest Source of Financial Reward

In most cases, more than 50% of all the money you will ever make from your business comes from the day you sell it.

Because of the costs associated with the startup and growth phases, your cash flow in the first few years usually is lower, making the eventual exit your greatest source of financial reward.

But most founders wait until they are emotionally spent and totally burned out to even think about an exit plan.

I’m going to walk you through five things you need to fix in your business before you ever talk to a buyer so you do not leave money on the table.

Stick around until the end because I’m going to show you one specific adjustment regarding your supplier costs that can increase your final sale price by tens of thousands of dollars, even if you only negotiated that change a few weeks ago.

I’m Ryan Condie, and at Quiet Light, every advisor on our team has built, bought, and sold their own online companies.

00:45 Is Your Business Scalable?

Before you dive into the mechanics, you have to look at the asset you are evaluating and ask yourself a hard question: Are you building a scalable foundation that will give you true operational freedom, or are you just trapped in a demanding, high-paying job?

When you build strong documentation, reduce risk, and remove yourself as a single point of failure, you’re not just preparing for an exit. You are creating operational leverage that makes the business highly profitable and enjoyable to run today.

Scalability is transferability, and scalability is acquirability.

The first thing you need to do is have dialed-in bookkeeping. This is the number-one thing most sellers I talk to miss.

Don’t try to do this yourself on a spreadsheet. Invest in retaining a professional bookkeeper to get your data in QuickBooks or Xero using accrual methods.

Do not rely on your CPA to handle your daily bookkeeping because most CPAs often make annual lump-sum adjustments that complicate the value of the business.

01:30 The Bookkeeping Trick That Adds $100K

A good bookkeeper will do accrual accounting.

For example, if you are running a growing ecommerce business, you are constantly buying inventory to keep up with sales.

If you use cash-basis accounting in this scenario, meaning you enter inventory expenses in the exact month that they happen, you are adjusting your seller’s discretionary earnings, or SDE.

Most times, this accounting mistake will lead to a lower SDE amount, which will drive down the overall value of your business.

The same can be said for SaaS businesses that receive annual payments or contracts. Buyers will want to see your accrual accounting when looking at your business.

The second major issue is commingled businesses.

If you run multiple businesses under one LLC with a shared bank account, you are creating a logistical nightmare.

I’ve done this. It’s way easier to test out the next idea under the current company.

Buyers do not want a messy deal where they have to untangle operations.

02:15 The LLC Mistake Lenders Hate

Commingling assets also prevents the business from being SBA eligible, which immediately shrinks your pool of potential buyers.

Set up separate LLCs for each business with separate accounting.

Third, you must audit your business for transferability.

Transferability speaks to how easy it is to hand the business over to a new owner so they can hit the ground running, or how dependent the business is on you.

It’s common to see owners who do all the sales for the agency.

By standard operating procedure document, when the buyer had a question, I referred him to one of the videos. He rarely asked another transfer question.

03:00 Make Your Business Run Without You

Again, if too much of the operational knowledge, reputation, or expertise resides solely with you, it is a dealbreaker for most buyers.

You need to reduce the business’s dependence on you. That could mean reducing hours or building out standard operating procedures.

Also, ensure your key employees are under contract and make sure you haven’t made any unwritten promises or raises or bonuses.

Fourth, you need to identify where buyers will see risk.

The thing buyers are trying to reduce the most is the risk within the business.

If your business relies on a single point of failure, such as a hero SKU or even customer concentration, buyers will pick up on this.

I’ve seen businesses where over 75% of the revenue comes from the top two clients. This poses a massive risk for buyers, and you’ll take a big hit on your valuation.

A buyer’s risk is different than a seller’s risk.

Put yourself in the buyer’s shoes and begin to actively reduce the risk in your business.

03:45 How Buyers Spot Weak Businesses

And fifth, pinpoint your legitimate add-backs.

Add-backs are adjustments you make to your profit and loss statement to reflect owner benefits, discretionary expenses, or one-time costs that won’t carry over to a new owner.

This could be your salary or one-time projects, such as investing a large amount of money into a new website recently.

Your business’s list price is determined by applying a multiple to your seller’s discretionary earnings, or SDE, which is your net income plus add-backs over the trailing 12 months.

You need to track these meticulously because anywhere from 10% to 30% of your discretionary earnings can come from add-backs.

Audit your profit and loss statements for things like one-time development expenses, owner payroll, or even personal expenses.

If you aren’t tracking these, you are leaving money on the table when you sell.

And keep in mind, every add-back needs to be tracked with receipts.

04:15 The Supplier Secret That Prints Cash

Remember that operational adjustment regarding your suppliers I had mentioned?

It is accounting for the recently renegotiated cost of goods sold.

Let’s say you negotiated better pricing with your manufacturer just three months ago.

A smart advisor will look at that renegotiated cost and factor it into your valuation because the new buyer will inherit the better pricing.

You can annualize those savings.

We apply that new, less expensive cost of goods sold to the previous nine months of sales as an add-back.

This increases your seller’s discretionary earnings, and when a multiple is applied to it, those recent negotiations scale up and can add hundreds of thousands of dollars to your final exit value.

The preparation you do today completely dictates the wealth you will walk away with tomorrow.

Do not guess what your biggest asset is worth.

If you want a realistic operator-to-operator look at what your business is actually worth right now, click the link in the description for a free valuation from the Quiet Light team.