The Five Most Important Things To Know Before Selling Your Business
Selling a business can change your life and, therefore, requires serious preparation. There are countless questions you can ask yourself to ensure you are 100% satisfied with the deal. What makes this process a little easier is prioritization, or figuring out which questions you should spend the most time thinking about. Doing this will create a sense of certainty in the areas that have the highest likelihood of leaving you unhappy.
Chances are, your biggest concerns involve numbers, the current state of your business, and your personal readiness.
Here are five things to know before selling your business:
1. Is the valuation correct?
Step one is obtaining a rough estimate of your business’s valuation. You can do this by coming up with three numbers, picking the highest one and then factoring in profitability. For the first number, add up your business assets and liabilities. The second number is an assessment of the current net worth of the business’s income stream. Lastly, find out how much similar companies are worth or have sold for.
You can usually get a good handle on profitability by comparing monthly profits to annual revenue and examining how your profits appear on tax returns. A business that earns $40,000 a month in revenue, for example, could be less profitable on an annual level than another business that earns just $10,000 a month in revenue. As for the tax returns, make sure your business does not have excessive write-offs since this can undermine the valuation.
2. Is the timing right?
If your company is on the decline, this is not the right time to sell. Any expert will confirm that the idea is to sell when your company is in its prime. A widely-used method to tell if a company has indeed reached its prime is examining profits over the past three years.
You might think that the state of your industry is a more important factor than the state of the general economy, but this is generally not true. Low-interest rates and a high-performing stock market can easily overshadow an underperforming industry. Besides, it’s already been established that your company is doing well, which looks extra impressive if the industry is not.
You also shouldn’t sell solely to score a nice chunk of cash. Money should not be your primary motivation for such a monumental decision.
3. Are you prepared to answer questions?
Buyers will expect you to answer a lot of questions -- even those they could easily find the answers to on a sheet of paper. They’ll want to know about the history of your business, how the valuation was calculated, the nature of your business partnerships, and why you are selling in the first place. Is your business prepared to adapt to changes on the horizon? Can your business survive without you? Does a single customer/client account for a massive portion of income and would your exit jeopardize that relationship?
Business owners are typically used to skirting the truth every now and then, but this is one occasion where you should be honest from the get-go. Experienced buyers will not expect your business to be absolutely perfect. And admitting your flaws is a lot less harmful than the buyer unearthing something contradictory to your initial claims.
4. Do you have a clear-cut plan for the future?
Perhaps the most sensible reason to sell is not to strike it rich but to enter a new lifestyle that is just as (if not more) fulfilling as running your business. But being prepared for a new lifestyle doesn’t mean simply being excited about retirement, spending more time with your family, etc. As a business owner, you are well aware that the future becomes a lot less intimidating when you have a clear set of personal and financial goals to work towards. Without a concrete plan, your post-business life could turn out to be downright miserable.
If your plan is to retire, confirm that the sale will actually give you enough money to do so. You can’t base that assumption on the valuation alone. Speak to an expert who will explain what kind of math you need to do to make sure you are selling your business for enough money to retire.
5. Are you emotionally ready?
You may be ready to let go of your business, but being ready for the process of letting go of your business is a whole other story. For some, this process can take nearly an entire year. That’s a lot of time spent with the buyer and/or the buyer’s team. Working closely with perfect strangers for so long can be emotionally draining, especially if you aren’t completely positive you are selling to the right people or are already burned out. Business owners are used to being tired, but you shouldn’t sell if you are feeling particularly low, whatever the reason may be. When lacking the energy and focus required for the selling process, you run the risk of making careless decisions.
Section three on this list touches on the importance of honesty throughout the deal. This includes being honest with yourself. Even if your business is doing exceptionally well, you won’t be happy if you sell for the wrong reasons.
The main point of these questions is to ascertain whether you and your business are in the right state to make this sale a success. There will be few, if any, surprises along the way, including anything that might dissuade the buyer. Just like any other business-related endeavor, you’ll only feel comfortable moving forward if you’ve checked for red flags in the likeliest of places.
Written by Forbes