How do I sell my business? Such a simple question. Unfortunately there is no simple answer. When it comes to selling a business, one size does not fit all.
The answer is a series of additional questions that need to be addressed first:
- Have you considered what you will do once you are no longer working 50+ hour weeks?
- Do you have a REALISTIC idea of what the business is worth?
- Have you updated your financial plan and Estate Plan to understand the impact of the net after tax proceeds will have on your personal finances?
- Have you done any tax planning?
These questions are more on a personal note. when it comes to interested buyers, the answers you need will be more standardized. Here is a list of things you need to know if you’re looking to sell your business for what it’s worth.
How big is your company in terms of revenue?
When it comes to selling a business, having a positive cash flow isn’t enough to entice a serious buyer. Options are very different for a $10m business versus a $25m business. This is especially true if those evaluations are widely different from the industry standard.
For instance, according to ToastTabb.com:
“The range for restaurant profit margins typically spans anywhere from 0 – 15 percent, but the average restaurant profit margin usually falls between 3 – 5 percent.”
This means that if you have a restaurant that makes more than the standard 15%, you can sell for a higher price. Additionally, this means anything lower than 3% will be a tough sell, if there is any interest at all. Additionally you have to consider the location your business resides in.
A restaurant making well above the national average can be enticing. However, if that restaurant is located in a high-volume tourist area you will want to compare your profit margins to other restaurants in the area, since high margins might be common.
Has the business been growing, or has it been stagnant?
While high revenue and profit margins are good, buyers want to know that there is room for growth. Buyers are looking for a return on their investment. They want the ability to influence the rate at which they get their money back.
This means they not only want to see revenue going up, but they want to be able to see opportunities to expand on already successful offerings. This means that if most of your business comes from only a handful of customers, or if you primarily sell a technology that is outdated, your company could have some red flags.
For instance, if you stock a product and it consistently sells out, this shows that there is potentially more money to be made by buying larger stock of an item. Often-times at a discounted rate. If you took the time to prove this yourself, that puts even more trust into a potential buyer that your business has growth potential.
A business that is stagnant in growth however doesn’t mean that nobody will buy it. After all, there are buyers that are just looking for an additional steady stream of income to add to their portfolios.
However, having a growing business will always give you more potential buyers than a business that has simply a steady flow of revenue. So, if you are looking to sell, make sure you have a proven process for growing your businesses value over time.
A great way to do this is to boost your sales for a few months before you decide to put your business up for sale. Depending on your business this can be done through aggressive marketing or sales processes.
Remember, the ultimate goal is to show that an increase in sales CAN be done.
For some ideas on how to increase sales, here is a video from sales expert Brain Tracy.
Is the industry facing technological threats / change?
While a business is profitable, changes in things like technology, disruptors, and regulations can impact the salability of your business.
You might have a highly profitable wine business, but if the laws change to where you can no longer sell past a certain hour of the day it’s going to negatively impact your business.
Even the world’s largest businesses can collapse thanks to changes in technology and disruptors. For an example of this look no further than the famous Netflix vs Blockbuster fiasco. Blockbuster even had the opportunity to buy out Netflix but turned it down.
Now Blockbuster is a thing of the past and Netflix alone took up over 12% of all internet activity back in 2019.
In addition to technological threats, a company or industry that has a negative reputation or public image can impact an evaluation. This is because, while revenue can still be profitable, buying a business with a bad reputation can have that reputation carry over to other businesses the buyers own.
This is why your reputation should be a top priority if you are looking to run a successful business that will eventually be sold at a profit.
Can your business handle a change in ownership and survive?
A growing business with a great reputation is fantastic news. However, a successful business should be able to run mostly independent from the owner who is looking to sell. Because of this, if your business growth depends too much on you, then when you sell the company has a high chance of collapsing.
Ask yourself, do you have a management team or at least key lieutenants in critical positions? Or are you the chief cook, the server, and bottle washer? No one wants to buy themselves a job. They want to buy a business that will grow their wealth without taking too much away from their other responsibilities.
You might be selling a restaurant to someone with several years of experience who knows exactly how to turn your business around. However, this extra work will be reflected in the price you are offered when you sell. Because of this, it is better to take the time to make sure you not only have solid systems in place, but that key employees stay. If they won’t stay after you sell, how quickly can someone be brought on and trained to fill their place?
All of this can be taken care of as long as you have solid exit planning processes in place. You can check out our free list of tools here:
Free Exit Planning Resources.
Now that everything is secure, how do I find suitable buyers?
Once we have answers to the above, we can start with what are your reasonable exit options.
Does your management team want to buy the business?
Do you have a management team that knows the ins and outs of your business? If so, they might be prime candidates to become the new owners. However, depending on your business, they might not have enough money to truly pay you what your business is worth.
Is your space desirable to private equity?
While single buyers can be beneficial, a group of private equity buyers can help you to sell your business quicker. However, you will have to know how to contact these interested buyers and they may not offer you as much as what the market will.
Is there a competitor that sees you as a strategic fit?
Being bought out by competitors is often-times the original goal of a small business. This is especially true in the technology space. However, if you decide to go this route, it may impact the loyalty of your employees. Especially if it leads to a drastic change in procedures or potential layoffs.
Will you use an exit planning service?
It’s possible to have most of your exit strategy covered yourself. Realistically though most businesses won’t be able to maximize the return on the sell of their company with a solid plan. An experience exit planner will not only guide you towards the best options for selling, they will also help you through the closing of the transaction.
After all, you don’t want to delay the sale of your business because of incorrect paperwork, untimely delays, or not understanding the overall pros and cons of what you’re being offered.
Am I ready to sell my business?
Once you decide to explore the idea of a sale, you are entering the great unknown. Who you choose to work with you and guide you through this process may be one of the most important decision you make.
The right team will help you increase the value of the business and run a smooth due diligence process. Additionally, they will help you maximize what you keep of the proceeds and help you prepare for life after the sale of your business. Finally, they will make sure you have a solid financial plan to help you protect your family and your legacy and assist with the transition of the business into the buyer’s hands.
To learn more how we can help you create an efficient, cost-effective exit strategy and maximize the value of your business contact me at joe@blueskyexitplanning.com or use the form below to schedule your free, no obligation consultation.
How to Determine What Your Business is Worth: A Complete Guide.