- Posted by: Ruth Van Vierzen
- Category: Blog
Selling one’s company is a common exit strategy for many business owners. But if preparedness to sell is left too late, those parts of the business that have been neglected can significantly affect the valuation and sale price.
Your sales department is one area in particular that should be evaluated well in advance of putting your business up for sale. Depending on the size of your company, how you generate sales may be just as important as how much revenue you make from those sales when it comes to valuing the business.
I recently spoke with two business broker experts who have decades of experience helping business owners sell their companies. I wanted to get their insights on the impact of the sales department in particular when it comes to valuation and a successful sale.
How does the sales department drive the business valuation?
The size of the business is a major factor in how much the sales department impacts valuation. Many small businesses operate without a formal sales department in place. Staff may wear several hats including sales, and there may be no sales processes for employees to follow. Buyers will take the size of the business into account when considering the valuation. However, there are buyer expectations that all businesses must meet regardless of size.
Steve Fylypchuk, Business Intermediary and owner of Murphy Business Alberta in Calgary, Alberta says that the sales department has an indirect impact on business valuation. “The Profit and Loss Statement and Balance Sheet are the vital statistics used during a business sale, reflecting top line sales and bottom line earnings. These will be impacted by sales, so you want processes to be in place and functioning well to support strong sales.”
Whether you are a two person operation or have a staff of fifty, having sales processes in place is just good business sense because the processes help to drive more consistent revenue, improve sales efficiencies, and allow for a smoother transition when the new owner assumes control of the business.
But putting these sales processes in place takes time to implement and produce results. So if you’re thinking of selling in the next 1 to 2 years, time is running out to make an impact on your valuation with sales processes.
Robert Mitchell, M&A Advisor and owner of Premium Mergers & Acquisitions in Guelph, Ontario says that “if the company’s size is such that a structured sales department is expected and warranted, then having an effective team is a major factor in your company’s valuation”.
What is the impact on valuation if the business owner does most or all of the sales?
The owner often handles most of the sales in small businesses. This is how the business grew from the ground up, and owners are usually so passionate about what they do that selling comes easily to them. Owners enjoy building close, long-term relationships with customers. But this comes at a cost in the long run if selling is the exit strategy.
Robert advises not to make the success of the company dependent on the owner’s relationships with customers. If you are planning to sell in the future, now is the time to hire and train at least one sales rep who can do sales just as well as ownership and can be assumed in the sale. This will give buyers more confidence that sales revenue can be maintained during the transition.
As Steve notes, “it’s harder to sell the business when the owner is the heart of the business. So it’s important to be able to demonstrate that you’re selling a turnkey operation that isn’t dependant solely on you as the owner to generate the sales.”
The challenge in this area is that business depends on loyal customers. And for small businesses, loyalty is often based on relationships with ownership. If this is the case with your business and you want to sell as your exit strategy, now is the time to introduce other team members to your loyal customers and allow them to forge strong relationships with those customers.
How important is it to demonstrate consistent month-to-month sales for valuation?
Steve and Robert agree that seasonality affects most businesses and buyers accept this during the due diligence process. What’s more important, Steve says, “is whether January looks like January should look based on the industry the business is in”. So the financials for a nursery or roofing business may show lower sales in January, which is to be expected. But if their numbers have dipped year-over-year for July, that is a red flag.
Robert says that your valuation will be higher if you can lower the risk factors that impact sales and profits. You want to be able to make a strong case that sales and profits will remain when the buyer assumes ownership. Robert cites the example of a transaction he brokered where the owner shared that his best sales person was off on maternity leave and the company took a 30% hit for that period. This is a situation where “you have a superstar salesperson but a broken sales process”.
Now is the time to audit your sales department for risk factors. Do an honest assessment of your sales talent and your sales data. Are there any risks that could be red flags for a potential buyer? Risks include:
- Sales concentrated with just a few customers
- Loyal customers may leave to your competitors
- Sales are generated disproportionately by sales reps (i.e. 20% of sales reps generating 80% of sales)
- Year-over-year sales are not consistent by month as would be expected for your industry
How can having sales processes in place impact the valuation and buyer interest?
Sales processes provide a blueprint for how sales are being generated and can be built upon. They speed up the learning curve for the new owners while also giving them peace of mind that processes are in place and generating consistent revenue.
Buyers will likely ask what type of customer relationship management software (CRM) you use to support sales and generate sales data. While your bookkeeping software will provide revenue numbers, it’s your CRM that delivers detailed reporting on sales department activity at a granular level. It you aren’t using a CRM for sales management, now is the time to start.
Sales processes cover a wide range of activity including onboarding, prospecting, follow-up, sales meetings and more. The first place to start is to do a thorough and honest assessment of the processes missing in your sales department. Then you’ll know what you need to start building out so you can demonstrate to buyers that you have a low-risk, high functioning sales department that will serve new owners well.
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