Selling your business can be exciting and scary. Often business owners aren’t sure what to expect.
It typically takes much longer to sell a business than it does a house, up to a year in some cases. However, under the right conditions – when you’ve taken the time to prepare your business – the sale can be much faster.
How much can I sell my business for?
This is the question you really want to ask. The truth is that most businesses don’t sell; they’re shut down by the owners or sold for their assets. According to John Warrillow, author of the book Built to Sell, when businesses sell the typical price is 3.76 times the pre-tax profits.
Depending on what industry you are in, there’s a rule of thumb outlining what your business will sell for. To actually sell your business, you need to have what buyers are looking for.
What buyers are looking for
Buyers will look for a number of things, including:
- Profitability – Buyers want a business that’s profitable and has a history of making money. It’s difficult to buy a business if you’re not going to be able to pay for it from the proceeds. Typically, buyers want to see three to five years of financial reports.
- Recurring revenue: Buyers want to see that your customers are returning on a regular basis and that you have a systematic way of tracking their business.
- Growth potential: People buy businesses because they believe they can make more money by improving systems or growing the business. Without this growth potential, it’s difficult to convince buyers that they should buy what you’re selling.
- Focused business: When a business starts to decline, it’s difficult to turn it around. Keep your pedal to the metal while you’re considering your exit.
- Systems: Buyers want to know that there’s an order to the business and the company doesn’t just rely on the owner.
An overview of the business sale process
Here are the 15 steps necessary for business owners to move through the selling process, according to Biz Owner Communications, an American brokerage company. It’s a great list of what you might expect. If you’re considering using a broker, fees will run from eight to 15 per cent of the selling price.
1) Work with your advisers to develop an exit plan:
- consider your personal goals, your financial goals, your current financial situation, your desired legacy, the approximate current value of the business and your estimated desired time frame for your exit;
- develop a contingency plan to be implemented in the event of your premature death or disability;
- consider tax implications and implement required changes to minimize taxes;
- determine your exit options (i.e. a sale to a third party, transition ownership to family members, etc.).
2) Identify obstacles to a successful sale and implement plans to overcome the obstacles.
3) Make improvements to increase the value of the business.
4) Make the decision to sell your business.
5) Interview, select and sign an agreement with a business broker or merger-and-acquisition intermediary.
6) Determine the fair market value of the business, your asking price, your desired terms and deal structure.
7) Prepare the business for sale (hopefully much was accomplished previously when making improvements to increase its value).
8) Market the business confidentially through the business broker/intermediary.
9) Meet with prospective buyers prequalified by the business broker/intermediary.
10) Evaluate any offers or letters of intent received.
11) Negotiate a preliminary agreement with acceptable terms, structure and contingencies.
12) Co-operate with and survive the due diligence process conducted by the buyer. This can be a long and onerous process, but the buyer needs proof that the business will survive without you.
13) Work with your advisers to modify and approve the definitive legal documents used to transfer ownership of the business.
14) Close the sale.
15) Provide post-closing training for the buyer and invest your net sale proceeds.
It’s really more than a 15-step process
Much as the first step has four elements, the other steps could also have multiple specific action items. In fact, the four elements within exit planning could have additional items themselves. The list could easily be 50 or even 100 deep. It’s just a matter of how much detail is provided or requested.
As an overview, however, 15 steps adequately describe the process.
Final thoughts
Recently I was approached by the owner of a business who wanted to get out of his business because it was too stressful. But he opened the business just a few years ago and was just starting to enjoy the fruits of his labours.
In talking to him, he realized it was his wife who wanted out. She wanted to step back but he was enjoying his success.
When you’re considering selling your business, there are a number of other things you should think about, including:
Are you being pushed or pulled from the business? Are you leaving because of the stress, lack of money, long hours or people in the operation? If so, you might want to slow down the process and figure out if you can fix the problems and enjoy the fruits of your business.
Pulled means there are other things you want to do that seem more compelling than what you enjoy about the business. This might be spending more time with friends and family, travelling, investing, etc.
Owners who sell their businesses without a clear plan of their future often have significant regrets.
Understanding the factors that are driving you to sell can help you in the future. You don’t want to look back in a year or two and regret that you sold the business you spent so much blood, sweat and tears building.
There are different ways of exiting. Owners often think their only option to get out of the business is to sell it straight out. This can be difficult. Consider other options:
- sell to family or employees;
- hold some equity in the business and take on partners;
- sell but finance the deal;
- sell the assets but not the company;
- hire managers to run the business so you can enjoy some income.
Bring in the professionals. Selling a business can be complex. You will need to work with your lawyer and accountant to ensure the process is smooth and you take the approach that makes the best sense for your future. Often a business coach or broker can help the process.
Don’t leave your exit strategy until the last minute. It’s difficult to sell a business if you’re sick or you’ve already checked out. You don’t want to leave this until it’s too late. Being prepared and understanding what’s needed to exit your business will allow you to sell quickly and ensure you have a plan that works for you and your family.
Reach out if you need help. Preparing to exit your business can be difficult and challenging. Typically, we work with businesses with five to 50 employees. We help them in a number of ways:
- plan strategically for success;
- understand profit potential and fill profit holes;
- develop your organization and management team for the future;
- systemize to reduce stress and create a business that’s not dependent on you;
- create value so you can exit when you’re ready.
If you have any more questions or need some help preparing your business for your exit, reach out to us. We’re more than happy to talk to you to see if there’s any value in working together. And we can give you some tips on what you can do to maximize your return.
Dave Fuller, MBA, is an award-winning business coach and a partner in the firm Pivotleader Inc. Dave is also a member of the International Business Brokers Association. Question or comment? Email [email protected]. For interview requests, click here.
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