When, Why, and How to Sell Your Business
You’ve spent hours, days, years, maybe decades working to make your company a success. Thanks to your sacrifices and struggles, your business is thriving. But now, it might be time to sell it, and marketing your own company can be almost as complicated (to do well) as it was to start it. How are you supposed to know when to sell your business? Why would you want to get rid of it? How do you even sell a small business? Demystifying the process isn’t as bad as you might imagine. It’s possible to get a solid sales strategy in place relatively easily, as long as you take the right steps forward.
The When
Knowing when to sell your business is maybe the most important piece of the equation. If you sell your company at the wrong time, you‘ll not only lose money, but you may destroy your creation in the process. The key step is to take a much closer look at the market climate. Of course, the ideal time to sell your business is when the market is up. Even if your business isn’t in the best position, there are buyers looking for businesses with potential when the market is up, but those buyers are hard to come by when the economy doesn’t look very good or business loans are harder to get. If the market looks like it’s headed for a recession, people might be more hesitant, and you’re not going to get the sales price you want or the number of buyers you hope might consider your business.
Greater market conditions, though, aren’t the only consideration to make as you work to decide when to sell your company. You’ll also want to take a close look at the local economy, and the individual industry economy. If your town or city is growing, more people are moving in, and business seems to be bustling throughout the city, then potential buyers will see a strong labor market, which creates a better time to sell.
Industry trends should also be a factor in your decision. Even if the US economy as a whole shows signs of growth, and the local economy is doing well, things aren’t always healthy within each industry. Imagine, for example, you own a successful residential construction company. Selling when the housing market is down may not be a good idea because there is less demand for new houses. More than that, though, know whether there are trends on the horizon in your industry that are threatening change. Making that change may be more than you want to deal with. If, for example, you run a taxi service in a small area, but people are starting to drive for Uber in droves, you‘re going to have to do some serious innovation in order to change your business to adapt to the competition.
In addition to evaluating the financial factors, though, you’ll also want to think about your company in and of itself. A buyer will look at the last three years of your tax returns as well as your balance sheets and profit and loss statements to see how well your business is performing financially. If your business is growing, they’re more likely to buy. But if there are competitors in the area that show more promise, then you may be looking at a potential buyer who then makes an offer to your competitor instead.
The financials behind your company aren’t all that predict the “when” of selling your business. In order to know when to sell your business, you’ll also want to show that you have a strong staff in place who will carry on the day-to-day operations after you’ve left. If your team is struggling, so is the health of your company.
Finally, the best time to sell your business is when you know big expenditures aren’t headed your way in the near future. Every business has capital expenditure needs. Make sure these are out of the way for a potential new buyer. Just like buying a house that needs fixing up, prospective business buyers will take into account the extra cost of additional investment in order to fix any problems that you may have been ignoring. In some cases, it might be easier and cheaper for them to do that post-sale, and for you to discount your selling price accordingly. If you can fix the problems for less than you’d have to discount your price, then it’s worth doing beforehand.
The Why
Even if it’s a good time to sell, why would you want to part with your business? There are a number of reasons to consider selling your creation. First, it’s important to remember that it’s okay to be ready to part with your business if you just don’t enjoy running it anymore. Many entrepreneurs love the problems and strategies involved with the start-up phase. Once a business outgrows that point, though, other problems begin to present themselves like HR issues, team building, etc. That’s just not fun for some entrepreneurs. If you’ve reached that point, it may be a good time to sell.
Another reason many prepare to sell their company is that it outgrows their current skills. As your business grows and changes, you may not be the best person to run it. If you’re great at sales, and you’ve built an annual revenue of $7 – 10 million, your company may be ready for leadership that can grow and stabilize it in different areas. Know what you’re good at and how that will help grow the company. If your skillset is in a very different area, it may be time to find a person with a new vision to run the company.
You may also want to exit your company because you have another offer on the table. If you’re approached with your dream job, find a way to take that! You can certainly find a buyer so that you have the ability to chase your professional dreams.
The How
You know you want to sell. You know when to sell. You know why you want to sell. Making it happen, though, is something else entirely. You’ll want to begin by preparing your financial records. Work with an accountant to prepare three years of tax returns and financial statements. You’ll want to be able to offer information about your company’s income over the last three years – including gross revenue, operating expenses, the cost of the goods you’ve sold, and the profits and losses. Finally, consider including a Seller’s Discretionary Earnings sheet. This is essentially your personal cash flow statement to help reveal the full earning potential your business might be able to offer others.
Once you have your financial paperwork in order, get someone to appraise your business. You’ll want to do this at least three years prior to your sale. Why does business valuation matter? Oftentimes, owners over or undervalue their companies, and being able to have a third-party document that values changes everything the moment you actually market your company. Find a good appraiser who can create a detailed explanation of how valuable the business is, and why, as that will offer you more credibility during the sales process.
Next, you’ll want to create an exit strategy. You need to know and be able to articulate exactly how you plan to wind down your involvement in the company once the sale takes place. Then you can create a contingency plan if something happens that’s out of your control during the sales process. Remember that your exit strategy should include a succession plan and a clear vision of the pain points and how to fix them.
Once you’ve done that, it’s time to decide whether you should work with a business broker. Selling the business on your own means you save more money and avoid commissions, but a broker can help you free up some time so you can continue running your business AND get the highest possible price.
The final step is to find the right buyer for your company. Keep in mind that a business sale can take years, and you’ll want to keep the process moving throughout. Stay in contact with potential buyers, and make sure they qualify for financing before you offer a lot of information.
The Final Word
Selling your business can be a complex process, and it’s fairly time consuming, but the reality is that when it’s time to exit the company you’ve built, it’s more than possible. Work with the right team of advisors to help you know when to sell your business, and how to move forward.
Reach out to us today to have a free conversation! We might just be the perfect fit.
