Selling a Business: 4 More Tips
28 May 2018
If you’ve begun thinking about selling your business, here are four things to know before developing the plan:
- What is your business worth?
The first thing to do is to get an estimate of your business’ value. You need to have some idea of what it’s worth to even proceed to the next step because if your plans for life after you sell require a certain amount of money, you’d better know up front if the sale of your business will provide that money.
How do you do this? Well, people approach this in many ways and almost all of them are useless.
There are “rules of thumb” which, by definition describe no specific business at all, least of all yours. There are “guesses” about “multiples”. But multiples of what? Revenue? If the multiple you heard a one times revenue and your business has revenue of $2.5 million but profit of only $25,000, do you thing that anyone will pay $2.5 million for a return of $25,000? Would you?
Is it a multiple of profit? Well, what is “profit”? Is it the number at the bottom of your tax return? Is it the bottom line on the company’s P&L? It is unlikely to be either. You’ve got to know what the true net profit is.
Some people estimate value by adding up the business’ assets and then subtracting its liabilities. But this exercise results only in “book value”; what the business might be worth at liquidation. This does not reflect its value as a “going concern”, an entity that generates cash for its owners on an ongoing basis.
The value of a business is generally considered to be what its Discretionary Earnings (“true net”) are worth. This means that you need to know what the Discretionary Earnings of your business are – and how they are valued in your industry. To learn more about discretionary earnings and what is needed to determine them, let me know here:
- Is the timing right to sell?
This is a two-part question; first, is the business at a point where a high valuation can be justified and, second, are you ready emotionally to let “your baby” go?
As to the first part of the question, there are a couple of things to consider:
- What is the general economic environment like? As I write this, interest rates, while rising slowly, are still at historic lows. Stock markets around the world are rising meaning that there is more wealth looking for things (businesses) to invest in. Tax laws in multiple countries are becoming more favorable to business and economic activity. There’s a bunch of cash sloshing around out there right now looking for businesses to buy.
- What is the recent history of your business? Look at the last three years’ economic performance. Are revenues and profits trending up? Down? Flat? If it’s either of the latter two, is there something you can do over the next couple of years to get that trend going in the right direction? If your company is on the decline, this is probably not a good time to sell.
As to the second part of the question, are you ready to step aside? What is your reason for selling? Are you burned out, tired or bored? Have you got another opportunity that you just can’t pass up? Is your health in decline or marriage dissolving?
The first part of the question is all about numbers. The second part is all about emotions. Both play pivotal roles in your decision-making when you start thinking about selling.
- Have you prepared your business for a sale – and are you prepared to answer questions?
Have you prepared your business for the inevitable examination? Most buyers are going to be more thorough in their investigations than the tax authorities during an audit. Any agreement to purchase your business will include a due diligence period during which buyers will look into every nook and cranny of your business’ operation. They will examine your books, your contracts, your list of clients and vendors, your financials, your tax returns and everything else that pertains to the business they are considering paying big bucks for. You would do the same. Make it easy for the buyer by getting things in order.
Buyers will expect you to answer a lot of questions — even those they could easily find the answers to in the documentation or marketing materials you provide. They’ll want to know about the history of your business, how the valuation was calculated, the nature of your business partnerships, etc. They will certainly ask, if yours is such a good business, why are you selling?
They’ll want to now if your business can survive without you? Do you have a level of management in place that can run the business in your absence? Does a single customer or client represent a major portion of revenue? Does a single vendor supply a critical component of what you sell? Would your exit jeopardize any important relationships?
It is critical that you be completely truthful and transparent during the buyers’ due diligence period. Though no one will expect your business to be perfect, if a buyer discovers some negative aspect that you failed to disclose, that buyer will suspect there is much more that you’ve failed to disclose and is likely to walk away.
- Have you got your plan for the future set?
One of the most challenging aspects of selling a business does not become apparent until the sale is done. That is, “what’s next?”
As many of you know from reading earlier posts or rooting around our website, this happened to me. In 1997 I sold a business that I had started six years earlier. It was not for sale and I had not prepared for life after the sale. I was lost.
Fortunately, I was single with no family or social obligations and after about two weeks I realized that I would have to do something to get out of my funk. I bought a ticket to Paris and spent a good part of the next four years wandering around Europe. But most people do not have that luxury. Spouses may have a career – or at least have a life outside of your business. Kids are usually involved; schools; etc. Not having a plan for your post-sale life can throw that life into uncertainty. Ya gotta have a reason to get out of bed in the morning – whether that reason be playing the Pro-Am golf circuit, teaching classes at the local university or taking a cooking course in Italy in preparation for opening your own restaurant or B&B.
As a business owner, you know you have to be productive, useful and live with a purpose. You know that life is a lot more fulfilling – and fun – when you have a clear set of goals to work towards. Without a concrete plan, your post-business life could turn out to be downright miserable. Whatever your plan is, confirm that the sale of your business will actually give you enough money to make it happen. If it won’t, wait a year or two – or scale back your plan. Few futures are more difficult to live in then one in which you’ve run out of money.
Want to learn more? We’ve put together Five Steps for Developing an Exit Strategy and it’s yours FREE by simply telling me where to send it.
Next week’s post will be about the talent you’ll need when the time to sell – or plan to sell – comes. I’ll be breaking this down for small “Main Street” businesses as well as for larger “Middle Market’ businesses. Consider subscribing so you don’t miss that post – or any others.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. For example, if you want to sell your business, what is your biggest concern about the process? Are you wondering what your business is worth or how long the sales process might be? Let me know. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
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