Someday, you might sell your business.
You may have planned for this all along, using a business sale as your exit strategy or wealth building plan. In other cases, the prospect of selling your business can be a surprising or even emotional issue.
If you’re in business, you’ve done plenty of selling. You’ve sold widgets. You’ve sold your services. You’ve sold potential employees on the idea of your company. You’ve sold investors on the potential of your business.
But are you prepared to successfully sell your business? Here are some things that you should be aware of as you prepare to sell your business.
1. Know your business value.
If you don’t know your business value, you’re going to go into the sales process blindsided.
The first logical step for selling a business is figuring out what buyers are looking at when they consider purchasing a business. There are three main approaches to determining a business’s valuation.
- Asset Approach – Add up all your business assets and liabilities. What number are you left with? This is the asset valuation of your business.
- Income Approach – The income approach to valuing a business is a simple assessment of the net present value of the business’s income stream. There are technical methods for determining this sum, but they are not necessary to calculate at early stage.
- Market Approach – The market approach of a company involves analyzing similar companies to see how much they’re worth and/or their selling price.
Select whichever of the above methods gives you the best (highest) valuation. When you have a ballpark figure of your business’s value, you’re ready to go to market.
Even though you’ve got a rough idea of your business valuation, this is only a number to guide you in your consideration. You’ll still need to get an accurate valuation in order to enter the market.
2. Know the best brokers in the business.
Unless you’re an expert business broker or M&A advisor, I advise hiring a broker to help you sell the business. A broker is especially valuable in the later stages of a purchase process — negotiation, due diligence, and the final sale.
3. Know your why.
Potential buyers are going to have a lot of questions when they entertain the idea of purchasing your business.
They’ll want to know the size of the business, the history of the business, the valuation of the business, and legion other details that you are prepared to answer.
But one question that always comes up is why. Why are you selling your business?
The way in which you answer this question can make or break the deal. The why question is an invitation for you to pitch the value and appeal of your business.
You’ve got to know exactly why you’re selling your business, and be able to articulate this reason. If the reasons are “personal” (e.g. a divorce) or obvious (retirement), then you can simply say so. Even so, you should provide a motivating angle that will sustain the buyer’s interest.
4. Know the perfect time.
Selling a business is all about timing.
The difference between selling your business at the right time and selling it at the perfect time is the difference between a major loss a life changing windfall.
What’s the “perfect time?” As unsatisfying as this answer is, it all just depends on the ebb and flow of your particular industry and the economy as a whole. Just as real estate and commerce has its seasonal trends, so the business acquisition industry has its highs and lows.
Here are some times you shouldn’t sell your business:
- When you’re burned out. Burnout is part of the entrepreneurial game. Don’t sell your business during a personal low. You’ll lack the energy and determination to fight for a fair price, and will end up regretting the sale later.
- When the company faces a catastrophe or disaster. Some buyers are eager to scoop up distressed companies, but generally speaking, this isn’t the best for sale strategy.
- When you just want a huge lump of cash. Lump sum buyouts are an appealing part of any purchase, but this shouldn’t be the driving motivation for selling your business.
Here are some times you should consider selling your business.
- When you are ready for a lifestyle change — retiring, spending more time with your family, enjoying independence, etc.
- You’re enjoying expert management. Business buyers aren’t just buying a soulless entity. They are buying people. The more capable your management team, the more appealing the purchase.
- During an upswing. If you’re on an upward trajectory, your business will be far more compelling to purchasers. Three years of profit is a great rule of thumb.
- When the economy is good. A great performing stock market and low interest rates are the easiest way to tell if the “economy is good.”
- When the company is performing well within an underperforming industry.
Selling a business is a big deal. It involves major life changes, huge sums of money, and a whole lot of time.
The final feature to keep in mind is that a business sale will radically change your life. Whether or not you remain as an active participant in the business, there will still be significant shifts in the way that you view the business and function in it.
In some cases, you may receive a huge sum of money from the sale of the business. Large sums of money force you to decide what you’re going to do with your life (not to mention what to do with the money). Before you sell — before you even think about selling — consider your goals and visions for your future.
Have you sold a company? What’s your experience?