Does a lack of formal processes hurt my business’s sale price?

If you run the business yourself, you may be the one who knows how everything gets done. That works until someone else has to run it. A buyer is paying for a business they can operate, so how much of it lives in your head is worth assessing before you sell. Whether that changes your price depends on the buyer and the rest of the business, and no one can promise a figure.

What BDC says buyers weigh

BDC, writing on negotiating a sale, poses the question of how easily the business can operate without the current owner and says that strong management teams, documented processes and clear systems increase value. It also says that by having pristine records, documented processes and a strong team, and by addressing issues before due diligence, a seller minimizes reasons for price reductions. Among the factors it lists behind price adjustments is the discovery that achieving the stated profitability will take more investment or effort than expected.

How a buyer tests what you say

BDC describes due diligence as validating the vendor’s information about the company, and says it gives the buyer access to the premises and records and, in some cases, to key suppliers, customers and employees. If your routines are informal, a buyer has little to check them against. That makes it harder for you to show how the business produces its results without you.

What you can do before you list

BDC’s guide for sellers suggests documenting and updating standard operating procedures so the company’s operations are more easily transferable to a new owner. Write down what people actually do, not an idealized version, because a buyer may compare the two. Useful starting points:

• the weekly routines only you currently perform, such as ordering, payroll approval or pricing quotes
• how customers are won, served and invoiced
• which employees hold knowledge no one else has
• where records sit, so they can be produced quickly for a buyer

Customer dependence is a related issue, covered in how much customer concentration is too much. For how buyers test your earnings, see how buyers verify your earnings.