By Trent Lee, the recipient of the award as the #1 business broker in the country by the International Business Broker Association (IBBA).
If you’ve reached a point where you’re considering selling your business, there is a lot to consider. You might already have some of your own concerns or questions jotted down—that’s great, and will help. Before even considering the sales process, let alone starting it, here are five questions that every business owner needs to ask.
1. Is the business ready for a sale?
In some instances, it might not be immediately discernable whether a business is ready to go on the market. You have to use this time to figure out why buyers would want your business. Consider what makes you unique from your competitors: How profitable has the business been? What financial trends have been unfolding over the last three to five years? Which of your company’s processors, procedures and systems have a successful track record?
Although the exact numbers vary depending on who you ask, it will take between six and 12 months, on average, to sell a business. You should be doing all the prep work along the way and as much in advance as possible. Two important factors when selling a small business are to make sure that you are not selling a job (i.e., a business that is dependent on you as the owner) and to make sure you have a clean set of accurate and organized financials that match your tax returns.
2. How much can I sell for?
This is the question that everyone wants the answer to. Of course, it’s also the one that doesn’t come with a straightforward answer. You’ll need your financial statements and the business tax returns over the last three to five years to help you determine the business’ value. You’ll want to make sure to work with a business appraiser, business broker and your CPA to determine the highest and best valuation, which will likely be a “going concern” valuation. These types of valuations are primarily based on a multiple of adjusted earnings or seller’s discretionary earnings (SDE).
Trying to price a business is not a do-it-yourself task. There are a number of different valuation approaches and you’ll want to work with a professional, certified business appraiser and/or business broker who knows the local market, has access to pull market multiples and knows and understands how to recast financials properly. Missing the mark on going to market, either too high or too low, could end up costing you in the long run. If you build a business that is not dependent on you and is priced right, you’ll be able to find a ready, willing and able buyer.
3. What happens after the sale?
This is where you need to take the time to decide what your role will be once the transaction is completed. Some people stay on in an advisory role or even serve on the board, but that’s not the case in all transactions. Typically, people just sell their business and move on after a short training and transition period.
Ultimately, you have to decide what’s going to be best for your company, best for your customers, employees and the buyer. If staying on in a longer-term transition period is something the buyer is requesting, you’ll need to be prepared for this. This is especially true if the buyer doesn’t have industry experience or if the buyer feels that you, as the owner, are vital to the continuity of the business.
In that case, they need to ensure that the business continues to operate smoothly post-closing, which could mean that your presence is required. If you are not willing to stay for a longer transition period, then the best thing you can do is make sure that your business, the employees and the customers can operate without you being there.
4. Am I ready to sell the business?
We’ve discussed making sure the business is ready to sell, but what about you personally? Do you have a hobby or plan for what is next?
As a business broker who has sold hundreds of companies, I see this happen over and over again. The business owner is burned out and wants to retire but six months to a year later, that same business owner is calling me asking for my help to find them a business to buy. When I ask what happened, it’s the same story: They got bored and are ready to do something else.
Most entrepreneurs are not built to sit on the beach or golf every day and find fulfillment and purpose in those activities. They often end up missing the feeling of accomplishment, producing and creatively building something of value. So make sure that you have a purpose and a mission for after the sale.
5. Who can help with selling my business?
There is an entire industry dedicated to business valuations, business brokering and mergers and acquisitions that can offer insight and support for people selling a company today. Most business owners only sell a business once or twice in their lifetime, and it is typically, from a financial standpoint, so impactful that you want to rely on a professional team of advisors.
You’ll need someone to help you with business valuations, a business broker or M&A advisor, a CPA and an attorney who has experience in transactional work in this industry. This may or may not be the same person who files your annual taxes or reviews your work contracts. Make sure to find professionals who have a long history and track record specializing in valuations and selling businesses, not just people who have done a deal here and there.
There’s a lot that comes to mind when you’re trying to determine whether now is a good time to sell your business. However, ask yourself each of these questions to make sure that both you and your business are ready. Remember that this is a collaborative effort and one that will result in success when you choose the right professional advisory team and follow the tips outlined here.