Selling a Business: Five Things to Consider

Five things?!? Just five things to consider when selling a business?!? Are you kidding me? Well, yes; there are TONS of things to consider when selling a business but, like all posts, I’m trying to keep this one under 1,500 words so that you, my worthy readers, don’t fall asleep in your oatmeal. I’ll tackle some of the “other things” in some future posts. If you’re a business broker – or plan to become one – or if you’re a business owner, each of these five issues should be considered. And as they’re considered, such consideration should be weighed with timing in mind.

When to Sell

Is it a good time to sell a business? Anyone who has been following this blog for even a couple of months knows that the business-for-sale market is “frothy”. It doesn’t matter what segment of the market a business is in – the Main Street or “mom and pop” market, or the Middle Market – there are a lot of buyers out there looking for opportunities. But at the same time, we are starting to see more and more businesses coming to market as Baby Boomers retire. In fact, I believe we are at the beginning of a long term trend – 10-15 years – of what we refer to as the Baby Boomer business sell-off; sometimes known as the Silver Tsunami.

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So, is now a good time to sell? I believe it is but the following five factors should be considered by business owners as well as by the business brokers that advise them.

The Five Things to Consider

1) What is the Market like?

The overall business market, mentioned above, is one thing. But what about the local or regional geographic market that the business operates in. If a business’ clients and customers are primarily local, what’s happening in the business’ service area is an important consideration when making the decision to sell.

If things are declining – businesses closing and population shrinking – with no big positive changes in sight, it might be wise to sell sooner rather than waiting in the vague hope that SOMEbody will do SOMEthing. But even if things have been declining, if a hospital has been approved or an interstate off-ramp is coming, it might be worth waiting a couple of years.

2) What is the valuation of the business?

Knowing what the business is worth is a critical consideration for a number of reasons among which is that the owner may be relying on the proceeds of the sale to fund his or her retirement. If the business’ value is less than what the owner would need to retire in the style they had planned – or to fund whatever the seller wants to do next – it may be wise to advise the owner to put the sale off a while and continue to build the business.  There are countless stories of business owners who sold prematurely, ran out of money and had to go back to work – but at that point it would be “for someone else”.

3) What are investors looking for?

Buyers in every category are looking for alternatives to traditional investment avenues. They’re looking for stability, reasonably predictable growth of revenue and profit, and more control. A business acquisition offers all of these characteristics and can also offer a better return than traditional investments.

4.) Number of buyers.

As I’ve written often, there are more buyers in the market right now than there are quality businesses to buy. There are investment buyers – such as private equity groups and family offices – early corporate retirees that want to own a business, strategic buyers looking for new products or services to offer their existing customers or new markets to move their products or services into and foreign buyers that want to establish a presence in a new country among them.

But there will come a time when the Baby Boomer sell-off will change this equation and there will be more businesses available to buy than buyers looking for those opportunities. The law of supply and demand tells us that when that happens, downward pressure will be put on prices.

5.) Political outlook

This is always the wild card.

In most instances, business owners plod along whether the business climate is buffeted by headwinds or buttressed by tailwinds. But regardless of the staying power of a particular business, owner or industry, business valuations are impacted by which way the political winds are blowing.

Putting aside consideration of any of the major disruptions that impact business – such as Brexit, the collapse of trade deals and the disaster unfolding in Hong Kong – two relatively minor political trends must be kept in mind when considering selling a business: capital gains taxes and the trend in the regulatory environment under which businesses must operate.

If capital gains taxes are likely to rise, they will reduce the seller’s net proceeds at sale thereby impacting the seller’s retirement lifestyle or requiring the seller to work longer to build the business to a valuation that would offset the increase in the amount of those proceeds our friends in government arbitrarily grab.

If the regulatory environment becomes too onerous, compliance costs will come out of the business’ bottom line, thus reducing value.

There is a ferocious debate in the United States right now on domestic economic and regulatory policy and the 2020 election will determine the direction of such policy and, as a result, the direction of the value of most businesses.

Timing

There are, of course, many other factors that business owners and business brokers must weigh when considering selling a business but these five issues are relatively easy to look at and determine.

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Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.

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The Bottom Line

There are a lot of buyers out there but there are also a lot of business coming to market, a situation that presents those buyers with plenty of opportunities. Sellers and brokers must be cognizant that there is and will continue to be competition. Is the revenue of the business increasing? Is the business keeping pace with industry and technological trends? Does the business and its people look fresh, excited and motivated or does the whole operation and team look tired and disheveled? Is the business’ value increasing or decreasing? (How to value businesses is a topic we cover at length in our course, The Basic “How-To” of Becoming a Business Broker™.)