Thinking about selling your business? This is an exciting time and an opportunity to cash in the hard work you’ve put in over the years. But, there are many important details that you must consider. If you’re contemplating the sale of your business, here are four issues to consider.
Is Now the Right Time to Sell?
Timing the sale of a business can be very tricky. The key to a great exit is to demonstrate growth for the past 2-3 years, so that you are selling on an uptrend. Many sellers wait until the business is either stagnant or on a downward trend, but that is a big mistake. Potential buyers will see the trend and factor that into the price they will pay. For this reason, it’s much smarter to sell when the business is growing (not stagnant or declining) to maximize the sale price.
In addition, you want to make sure that you discuss the proposition with your financial/wealth advisors to understand how the sale of business will impact your net worth, retirement plans, etc.
Do You Have Your Diligence Materials in Order?
An astute buyer will conduct thorough diligence prior to purchasing your business. Their diligence will include financial, operational, and legal diligence. Sellers need to prepare this material long in advance of the sale.
With respect to financial diligence, buyers are going to see financial statements (balance sheets, income statements/profits & loss statements, cash-flow statements, and tax records. These records need to be detailed and very organized. In fact, the financial statements need to be able to tell the story of the company and how it makes money. If you don’t have this type of documentation well organized, then the time to get in good order is now (or possibly yesterday). If you don’t know where to start, contact us and we can help you find a qualified professional to assist you.
On operational diligence, a buyer will want to determine whether the business is in fact transferrable. Does the business have well organized and documented policies, procedures, and systems that can help the buyer understand the business processes (or train new team members on the processes)? A company with documented processes that runs like a “well-oiled machine” will get a premium price.
On the legal diligence, a buyer and his/her attorney will want to inspect a slew of legal documents, including (for example), documents relating to the business structure (e.g., articles of incorporation, capitalization tables, bylaws, shareholder agreements, etc., etc.,), agreements with your customers, and agreements with your employees (especially if the business relies on intellectual property or trade secrets). The better organized this information is, the smoother the sale will be.
What is Your Valuation Based On?
When thinking about selling your business, you undoubtedly have a dollar amount that you expect to get out of it. Unfortunately, many business owners anchor their expectations of the sale price to an amount “they put into the business” or an amount they need/want for retirement. But neither of these are appropriate measures for determining a sale price. In reality, the purchase of a business is a financial decision and, thus, a buyer will only care about what the business is capable of producing in the future and will view the amount “put into it by the owner” as a sunk cost. Work with a professional to determine what a fair market value is for your business and then decide whether or not you would be willing to sell at that price (or what it will take to grow your business to reach the value for which you would be willing to sell). If you don’t know where to start with valuations, contact us and we can help you find a qualified professional to assist you.
Are There Non-Financial Deal Breakers?
Do you have any types of deal breakers that would cause you to decide not to sell, even if you got your asking price? For example, is it important to you that your employees are given the opportunity to continue working with the new ownership? How long (and to what degree) will you be willing to help the buyer transition the business to them? Are you willing/unwilling to agree to receive some of the purchase price in the form of a promissory note (i.e., seller-carry financing) or an earnout?
Questions or comments? Need assistance selling your business? We can help – contact us today to learn more!