Make Sure Buyers Have the Correct Image of Your Business

Do you ever look in the mirror and wonder who that person is staring back at you? That person with an extra twenty pounds looking back at you probably isn’t the image you have of yourself. But others see the twenty pounds when they look at you. The way we perceive something is not always the way others see it. You can’t hide that extra weight for long, so you better start preparing to lose those extra twenty pounds by changing your routine.

Buyers may also have a different image of your business than you have. You might be tempted to claim that your software developers turn out bug-free code, but that might not be the buyer’s perception if your software has a reputation for failing. The buyer is likely to see through your claim (and, when they find your software bug list, it will become a negotiation item). You may need to make changes to the way you do business by hiring a software quality assurance person instead of making bold claims you can’t defend. The way to improve the “curb appeal” of your business is to make changes to the business. There should never be a gap between what the buyer perceives and what the buyer is purchasing. What you tell prospective buyers must match what they see when they visit and must be validated through their analysis. What potential buyers examine cannot be a facade. Business buyers are going to perform a detailed due diligence and they will see through any facade. Improving your curb appeal means that even if your kitchen is small, it should be the best small kitchen a buyer can find—they will see the value your kitchen will give them. You should always assume that the buyer is looking at multiple businesses. This means you need to create a discriminator that makes them choose to buy your business. You must be credible and believable to potential buyers at all times.

To maximize the return from the sale of your business, you need to start managing the image others see when they look at the business. Managing the image of your business doesn’t mean creating a false image. It means pointing out the business’s strengths, telling the truth about it, and making any needed improvements. It could be that your business already has the image you want buyers to see; but if the buyer sees an unrealistic image, then you need to change your business so that reality matches the image. If you want to change people’s perceptions, you will need to be prepared to make changes to the business.

Does Your Business Have “Curb Appeal?”

“Curb appeal” is one of those terms that has become highly overloaded. “Curb appeal” has a different meaning in the sale of a business than it does in residential real estate sales. In residential real estate, curb appeal refers to what a buyer will see “from the curb” when driving by the property. There are no drive-by sales in business. Curb appeal for a business means demonstrating, to the greatest extent possible, why your business’s value proposition makes buying your business a good investment and worthwhile opportunity. “Curb appeal” in business is when a potential buyer sees the transferrable value of the business demonstrated.

Improving the curb appeal of your business includes cleaning up and preparing the external image of the business so that it appears successful. It also requires being prepared to demonstrate all facets of the business’s operation to a potential buyer. The business needs to be honestly positioned and appear as successful and professional as possible. For example, an online web business with no operating facility still needs to work on its curb appeal by making sure the image it presents to a potential buyer, based on its website and financials, demonstrates the transferrable value a buyer will be interested in. Business sales require a sufficient level of buyer analysis to entice them to look further—and hopefully, eventually buy. Your job is to prepare the evidence needed to convince the buyer that it’s worth their time and money to look deeper. They should not have to dig too deeply to find value in the business.

In Jerry McGuire Tom Cruise and Cuba Gooding Jr. famously shout, “Show me the money.”4 What a buyer wants to shout at you is “show me the value.” You can’t just tell buyers about the value in your business; you must be prepared to demonstrate the value to them. That is how a business generates curb appeal. Unlike residential real estate, improving the curb appeal of a business requires going more than surface deep. I’m not knocking how difficult it is to sell residential real estate. I’ve tried it, and it’s not an easy way to make a living. Residential real estate sells to a different market with different motivations than a business sale.

The sale of a business requires a clear understanding and demonstration of your business model. Even though you are in “selling mode,” you need to limit the amount of puffing you do. Puffing means overstating the features or value of your business. When “we have the greatest kitchen in town” turns out to be a false statement, you have probably lost the buyer (who will be thinking what else you might be exaggerating or which is simply untrue). “Our kitchen is small, but we made it highly efficient to support our menu” is a much better selling statement. A bright, clean, highly efficient kitchen is a better marketing statement than anything you might say.

If part of what you are selling includes the capabilities of your team, it’s not sufficient to simply show a buyer the resumes of key employees. There should be a history of performance bonuses and creativity or other awards, acknowledgments, etc. hanging on the wall where buyers can read them while they are on tour. And yes—it’s also good for employee morale, which is also a great selling feature.

As you start positioning your business by determining what potential buyers will be looking for, search for a way to put the answers to those questions in front of them. If your business is a retail store located in a strip mall, it should look like the most successful business in the mall. You want it to be obvious to a buyer why shoppers are attracted to your store, why these customers want to come into your store, and why it is more attractive than another store they might also be considering.

“We knew buyers would be interested in our production speed, so we posted production charts in the shop because we understood that would be a discriminator for our sale.”

The answers to a potential buyer’s questions should be obvious. If you’re selling a restaurant, the kitchen, the dining room, and the restrooms should be sparkling clean, and the buyer should see how efficient your service is. If your business is a light manufacturing company, the shop should look well maintained and organized so a buyer can see how efficiently your assembly line works. If your business is a software development company with a staff of young, highly energetic engineers, it should be obvious you have created an energetic environment that challenges the staff’s creativity. I had one client who put in a pool table and sponsored after-work activities for their engineers because they recognized that their team had more ideas in group settings than they did working at their desks. One of the greatest chances to make an impression on a buyer is when they first walk in the door. You know you’ve struck gold if their reaction is “wow, this is just what I’m looking for.” That type of reaction doesn’t come by building a fake facade over the front of the building like an old movie set. You must clean up, improve efficiency, and make changes that encourage creativity and motivate staff. Creating curb appeal for a business means painting, polishing, and cleaning, but more importantly it means preparing to demonstrate the transferrable value in the operation of the business.

Be Prepared to Demonstrate Your Business in Operation

In residential real estate sales, a technique called staging is often used to help create an image for a home buyer. Staging a vacant house, by minimally furnishing it, is a marketing technique that allows prospective residential real estate buyers to envision themselves living in the home. Since your business is operating and isn’t “vacant” this type of staging doesn’t work. When someone invests in a business they want to see products moving off the shelves and services being provided to customers, so they can observe firsthand how the business operates. You’ll want to demonstrate and validate the value proposition of your business by showing it in operation so the buyer can observe it. Of course, cleaning and painting to freshen things up, particularly if the deal includes real estate, may make sense. Falsely staging a business or intentionally planning to mislead a buyer should never be your goal when positioning a business. I had a client who was selling a paint store. The buyer asked to sit in the store on Saturday and observe the store in operation. Knowing the buyer would be there, the seller arranged to have friends come by acting as customers and the buyer got to see a false image of a crowded store. It was so crowded in fact, that the buyer got suspicious. The next Saturday the buyer sent people in unannounced to observe the operation of the store and found it much quieter than the prior week. The buyer realized he had been given a false image the prior week and the deal died immediately.

Positioning a business is similar selling a car. When you sell a car, you try to keep the car clean, waxed, and polished while you’re also driving it to work every day. When a potential buyer is coming to see the car, you want to wash it and vacuum off the floor mats to make it more presentable . . . but like business buyers most car buyers will want to look a little deeper and open the hood to check the oil. It’s hard to keep your business operating at its peak because, in business, things can and do go wrong. If you’ve been performing regular maintenance on the car you won’t need to take the time to change the oil or do any of the other things that should be done as part of the routine maintenance you perform on a periodic schedule . . . and you should have those records to show the buyer.

A car buyer may look at the dipstick to see that the car has clean oil but showing the receipts for the regularly scheduled maintenance you’ve performed adds value. The same is true for your business. You need to demonstrate that the business has been routinely maintained as part of its ongoing operations. Showing the records for the normal operation of your business is a significant way to demonstrate value. If the car’s oil is dirty or the level is low, the buyer is likely to try to use this to negotiate a lower price. The same is true for your business.

If your business uses specialized equipment, showing routine maintenance records for that equipment or a regular upgrade of your software says a lot about the operation and potential value of your business. Buyers expect businesses to run into problems, but they want to know how the business manages those issues and how it mitigates potential risk. Be prepared to have a frank conversation with a buyer when they ask about scheduled equipment maintenance and upgrades to keep these from becoming negotiation items used to lower your return.

If the business is operating well but starting to show its age you may want to improve its value by updating the operational software systems you use to the latest version or installing the latest industry machine tools. If you see changes to your operations that will add value, then now is the time to make the change. Just like you would improve the curb appeal of the car by adding a new set of tires, you may want to consider making some additional strategic investment to justify asking the top value for your business.

Effective positioning means you are prepared to make the trade-off between the expenses of an upgrade against your sale price . . . and keep a potential investor from negotiating the price down by saying it will cost them to do those upgrades. Positioning such as this needs to be performed with your anticipated negotiating strategy in mind and well before you get to the deal table. If you do perform regular maintenance and upgrades as part of the normal ongoing operation of the business this should be pointed out as a feature and used to add value to the sale of the business.

“Yes . . . our shop has the latest CNC milling machine software allowing us greater precision and putting us far above our competition.”

Talking to Your Employees

It’s difficult to find the right time to notify your employees that you are selling the business. Most advisors will tell you, the longer you wait the better off you will be . . . and in some cases, this can mean not saying anything until the deal has closed. “Hi, I’m your new boss” is the first hint they get of the sale.

Even if this is your plan (or the buyer’s, which is more likely the case), it is rare that the sale of a small business can be kept secret from the employees for long. Employees sometimes see the sale as an opportunity to try to negotiate a promotion for themselves into the deal.

“Sure, I’ll stay but I want a 20 percent salary increase.”

You don’t want to panic your employees into sending out resumes that flood the market . . . including places where your competition might see them. That would put you in the position of trying to negotiate a deal with someone who already has the ability to hire your key employees through a head hunter . . . you will lose that negotiation. The problem is, in most small businesses, the employees will pick up on the activity related to a sale well before closing.

Waiting to tell your employees about the sale starts to sound like a good plan but it’s not an easy secret to keep. You will probably want to let the people who have supported you and been loyal to you know what’s happening with the business. In practice it is highly unlikely you will complete a sale without at least some of your key people being aware of what’s going on . . . because no matter how hard you try not to involve them, you may need their help to prepare for the sale. Besides, are you really ready to wait until after the deal is closed to tell even your direct staff? That would mean the first time they hear about it would be when the new owner calls them together and says;

“The business was sold last night and we, the new owners, are inviting you to stay employed with us and here is your new benefits package.” “And if you don’t like the package you are now unemployed.”

Some buyers feel this type of approach immediately shows the employees who is in charge. In cases where the buyer has more interest in acquiring the product line than the employees, they have no fear in using these tactics. I have seen this happen and it is a cold dose of reality for the employees. Keep in mind, while this conversation is going on, and depending on the type of deal you make, you may be at the beach on your third rum punch, so you might not care . . . but those people who have been loyal to you probably won’t be wishing you luck at this point if the sale truly came as a surprise to them. You may still be there to help with the transition of the new owners or have some thoughts of hiring your key employees again in the future, in your next business, but your agreement with the new owners will likely keep you from doing that for at least a year and will likely lock you out of the industry for some time. They may ask, but you may be constrained from hiring them again. No matter what the circumstances are, your relationship with these former employees will have changed.

In practice, you will need to decide if there are employees you trust enough to confide in and at what point you want to disclose your plans. Tread carefully. This is your life, but it is their job. You will be taking a risk when you disclose the sale so limit those who you talk to. When you speak with your employees and what you say to them may become one of the buyer’s terms of the sale. If you speak with employees too soon it might have a negative impact on the deal. Remember that the buyers you’re trying to bring may be the people your staff has been competing with and correctly or incorrectly, they may have some preconceived thoughts about each other.

“I’ve heard about the way they treat their people.”

“I just can’t work for them.”

“I used to work for them and don’t think they’ll keep me when they take over.”

Selling your business won’t make your employee headaches go away. It will amplify them . . . for a short time. Putting employee agreements in place with your key staff may help to protect them . . . but don’t wait until the last minute to do it.

It takes committed resources to perform many of the tasks needed to correctly position a business. Collecting your records in preparation for due diligence, recasting your financials to identify valid financial adjustments, identifying potential strategic partners, reviewing the legal structure and ownership of the business, writing a business plan that will serve as a marketing brochure for the business are all positioning activities you need to undertake before you speak with any potential buyers. If your business is going to operate at its most efficient, your staff will be busy and may have limited availability for these additional duties and you will want to limit how many are exposed to your exit strategy. You need to consider bringing on a transition team that is committed to the success of the sale, hopefully one that has experience in mergers and acquisitions, at the appropriate time to handle the sale of your business.

Jim’s Bakery Example

Jim had existing employment agreements with his CFO, Retail COO, and Commercial COO so he knew their compensation would be protected in the sale. This meant he could bring them in on his decision to sell early. He made it clear from the start however that there was no room for them to renegotiate those agreements. He explained that he would need to ask them to put in extra effort to support the sales process but assured them he would not forget about the extra effort. He planned to bonus all three, not just for their effort here, but for their continued loyalty and the roles they had all played in helping to grow his business. Jim knew he would need to bring in other professional help, but this was going to be his core team.

To kick off the team, Jim gave them some initial guidelines.