Business succession is a long process, not an event. If you deal with your business succession as something to be decided upon when the time comes, you'll deny yourself the chance to increase the value before then. If you are developing or growing a business you should do it with the view that it will one day be sold.
So wherever possible, business succession should be mapped and planned at least three to five years before selling. When assessing the value of a business, most purchasers will look for established trends. The purchaser and their adviser will ask to see the Financial Statements because they reflect the business performance over a number of years.
Any changes you have been making to enhance the business value should reveal themselves over a sustained period. If you show sudden improved performance in the last financial year or in the 12-month budget, it could be viewed with scepticism. Whether it is viewed as a mistake or as a concoction, it could discount the ultimate business value that the purchaser accepts.
Here are the critical steps if you plan to sell in five years:
1. Undertake a business diagnostic. This involves reviewing your whole business, including what is working and what isn't. Conduct a risk analysis and identify areas for improvement. Find out what you don't know about your business.
2. Complete a business valuation. Figure out what your business is worth now to give yourself a benchmark. Learn to understand true value of your business so you can start promoting it to yourself, for good practice.
3. Do the housekeeping. Ask your bookkeeper and accountant to check that recent balance sheets are correct. This may take some time to sort through now, but will save time later if you find that any incorrect rolled forward balances have distorted your business value when its time to sell.
4. Enhance your business. After performing your business diagnostic, you can now start making changes that will create measurable improvement over a sustained period.
5. Create a trail of results. Regularly create and save reports which track the changes and improvements achieved. Build your forward budgets and profit projections around the leverage that will result from the changes you are implementing.
The above process allows you to establish your positive trends over a three to five year period. Then you will be better prepared and confident to state your price.