You have been building your business that you’ve put a lot of time, effort, and sweat equity into growing, and now you’re looking to sell. Your objective is to get maximum value, and you’re assessing steps to prepare for the sale. There are a multitude of variables to consider and in this post, we’ll cover them all to help you maximize the price you receive when selling your business.
WHAT IS YOUR BUSINESS WORTH?
What a business is worth is relative to your individual business, the market and what potential buyers are willing to pay. However, there are some common questions to consider, including:
- What are the sales?
- What is the profit?
- What are the growth trends?
- What is driving new sales and is that sustainable?
- What channels do new customers come from and what is the breakdown of each channel?
- What is your market position?
- How reliant is the business on the owner?
- What systems and processes are in place to run the business?
Part of the valuation process is looking at historical sales of similar businesses and comparing your business to those. The accepted valuation methodology by buyers is the multiple of earnings method. The multiple of earnings method calculates what the net profit of a company was for the last 12 months and then multiples that by a number between 1-4. Smaller companies sell in the 1-2X multiple range, medium in the 2-3X multiple range and large in the 3-4X multiple range. For example you have a transport company in Dallas Texas that makes $500,000 profit per year for the owner. That would sell in the 2-3X multiple range so between $1 million and $1.5 million dollars.
WHAT MAKES A BUSINESS WORTH MORE?
The amount a buyer is willing to pay for your business will all come down to two things, return-on-investment (ROI) and relative risk. The lower the risk, the higher the price and vice-versa. With that being said, what really makes your business worth more is mitigating the risk of the business failing in the future by having the following characteristics associated with your business:
- Predictable key drivers of new sales
- Stable or growing customers from diversified sources
- Established suppliers of inventory with backup suppliers in place
- High percentage of repeat sales
- Clean legal history
- Brand with no trademark, copyright or legal concerns
- Documented systems and processes
- Growth potential
WHEN IS THE BEST TIME TO SELL YOUR BUSINESS?
There is never the ‘perfect time’ to sell your business. Sometimes you are forced to sell because of external circumstances; sometimes you get presented an offer that is too good to be true. However for the scope of this article the best time to sell your business is when there has been sustainable growth. Growth is tracked in yearly increments. Let’s take the following example:
- Year 1 Profit – $280,000
- Year 2 Profit – $465,000
- Year 3 Profit – $780,000
- Year 4 Profit – $690,000
In the above example, the best time to sell would have been late in year three. You don’t want to make the mistake of selling your business once you’ve lost interest, and the business is starting to decline. This can significantly impact the offers you receive.
WHY DO OWNERS SELL THEIR BUSINESS?
Commons reasons we find owners selling their business:
- Retiring<//strong> – Don’t we all want to be sipping Pina Coladas?
- Focus – Another business owner wants to work on something else
- At Your Capacity – You have grown the business to the size your ability allows
- Burn-out – You are overworked
- Opportunity – You have another investment that you want to take advantage of
- Need The Cash – Sometimes life situations come up and you need some money
WHAT IS THE SELLING PROCESS?
The selling process of how to sell a business is fairly straightforward but can be more complex and take more time depending on the size of the business. In general, most sales will be structured like this:
- You decide to sell
- You get a valuation of your business
- You develop a prospectus (all the facts and figures about your business)
- Find potential buyers for your business (whether you use a broker or sell it yourself)
- Negotiate a price with potential buyers (total price and also terms of the deal)
- Transfer the assets & money
- Help train the new buyer to run your business
HOW LONG WILL IT TAKE TO SELL YOUR BUSINESS?
The time it takes to sell a business depends on the individual business and terms of the deal. Generally though, larger deals (over $1 million) will take longer to sell than smaller deals (under $200k) because of the complexity of the business and also the risk that a buyer is taking. Industry reports say the average time to sell a business is 10 months.
WHO WILL BUY YOUR BUSINESS?
They are a lot of potential buyers on the market for businesses. Through experience, many of them fall into one of the following personas:
- Individual Buyer – This is someone looking to buy his or her first business. They usually are a high paid employee or C-level executive with disposable cash, IRA, savings or access to an SBA loan.
- Other Business Owners – Individuals who have been in the industry for a while and have a good understanding as to what it takes to run a business. They are either fresh off the sale of their last business or looking to add a business to their portfolio.
- Private Equity Companies – Companies that look to keep the existing management in place and grow the business through varying-sized stakes in the business. Usually, private equity firms purchase larger businesses.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should not be relied upon unless coordinated with individual professional advice. Article courtesy of: