When is the right time to sell your business? We hear replies ranging from “I don’t plan to sell my business” to “I’d sell it yesterday if I could!”
One certainty is that EVERY business will experience a major change in ownership… eventually. It’s just a matter of time. People don’t live forever. Companies, trusts and other structures can last a long time but they are ultimately owned and controlled by people whose interests and motivations will change. Here are some factors business owners should consider… IRRESPECTIVE of when they plan to sell.
Be in Control of the Process
As a seller, you want to control as much of the transition as possible. That means deciding the timing of any transfer, the identity of the new owner(s) and the value at which assets are exchanged. Very few business owners end up completely satisfied on all of these factors, but planning can greatly improve the outcome. It is sad when an owner who has worked hard to create value is ‘forced’ into a sale on terms that are unattractive.
Be Clear on Your Goals
You can achieve different things from selling your business. For example:
- Wealth creation: The sale of the business could help you achieve your financial goals. That may mean never having to work again or making enough to invest in another business.
- Raising capital to pay debt: Owners may sell stock to pay debt (while continuing to work in their business or in a different business).
- Boredom: Maybe you are less motivated by financial outcomes but no longer want to own or work actively in the business. There may be other things you want to do.
- Changing circumstances: You may experience changes (such as illness, or a family crisis) which require a change in your activities.
- A combination of the above
Be Realistic About the Future
History shows us that past events do not necessarily predict what will happen in the future. For example, you may have enjoyed sales growth for 5 consecutive years, but that doesn’t mean growth will continue. When the valuation of your business has reached an attractive number (and if your goal is wealth creation), there is a danger of ‘holding on too long’. The value may decrease and/or the opportunities to sell may decline.
Think Through the Numbers Carefully
Financial modelling can inform your exit planning. For example, you may have a specific dollar figure in mind to secure your retirement based on discussions with a financial planner. Take into account your wealth in and out of the business and, remember, if you owe any money to the business, you will probably have to pay that back at the time of the transaction.
You will also want to value your business. Get advice on this because there are many valuation methodologies such as net asset value, discounted cash flow, multiples of EBITDA to name a few. Different industries will have different methods of valuation and market conditions will have a major influence. A fabulously successful business may fetch a very low price… in the depths of a recession.
Factor in the Cost of Selling Your Business
Business brokers, lawyers and tax advisors will be eager to advise you on your deal but this comes at a cost. Then there are taxes which will need to be paid! The incidence of litigation after the sale of a business is relatively high (especially for large transactions) so an ultra-conservative approach would factor in litigation costs.
Think Hard About the Non-Financial Terms
The transition FROM founder, majority owner and principal TO employee / contractor, minority shareholder in SOMEONE ELSE’s business, can be significant. The parties may set out with the very best intentions but find it difficult to collaborate after the transaction. At worst, relationships break down resulting in a time-wasting, draining and expensive conflict.
Think About What You Will Do After the Transaction
Some business owners who have been fortunate to sell their businesses on favorable terms find themselves with time on their hands. For some, this is an opportunity to forge a new career or focus on other interests. However, many sellers arrive at this point with no idea what to do next… and they find the transition challenging.
Run Your Business so it’s Always ‘Investor Ready’
Don’t be the seller who has to ‘clean up’ years of accounting, HR, customer and legal information when a buyer expresses interest. After all, a valuable business is a well-run business and that means keeping your business affairs in order.
Create ‘Competitive Tension’
You are always in a stronger position when dealing with more than one interested party. Compare their offers and negotiate towards the best outcome. Very seldom does the seller ‘hit the bullseye’ in a transaction, but multiple suitors generally give you more options.
The world of transactions is uncertain… but we can reduce the risk by taking a long-term view and making good (early) choices. You may only sell one business in your life, so it’s sensible to get advice from experts who see many transactions unfold.
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