For many small business owners, their business isn’t just a source of livelihood; it’s the whole retirement plan, often life’s work, and a testament to resilience and entrepreneurial spirit. As business owners, thinking about a future after business or approaching the twilight of their careers, the decision to sell their business becomes not just a financial transaction but a pivotal moment. Selling your business then demands careful planning, strategy, and execution.
You need a road map to understand what is involved in achieving the sale of your business. I find the stress of the sale process manageable when it is broken down into bite-size chunks or is stepped.
Lesson One – What are you worth?
The first step in the sale process then is to know what your business is worth.
Firstly, what sale price do you want to sell your business for?
What will you ask?
What do you think would be a fair reward for all your efforts?
It is a point where emotions start to play a part. Understanding that it is your life’s work and ambition, and you want to be rewarded for all that time, effort, and risk.
Getting a handle on the value of your business and what your business will sell for are two different matters. The value of your business goes beyond your profit and loss statement and your balance sheet. It considers factors such as goodwill, brand reputation, customer base, intellectual property, and future growth potential.
The process of valuing your business provides for a theoretical estimation of your business’s worth. This will be based on various financial factors. This will include the financial performance of your business as well as its financial position, what working capital is required to be invested, and so on.
The valuation will also focus on non-financial factors. These are equally as important to understand. For example, such non-financial factors may include:
- Brand reputation and equity
- Market positioning
- Competitive advantage
- Customer relationships
- Human resources and whether they have any special skills
- Operational efficiency
- Documented policy, procedures, and processes.
The more that is understood about your business by a potential purchaser, the lower the risk potential purchasers will sense. This means money for you.
Valuers will attempt to value your business in several ways but generally, on the following basis:
- Asset based where the business is calculated by measuring the difference between assets and liabilities.
- Income approach (popular) where the earnings from the business or expected future income streams are assessed using risk multipliers.
- Market approach where the earnings of a business are multiplied by a price-earnings ratio.
- Recent sales approach takes market data from recent sales of comparable businesses.
Now that you have a theoretical value for your business, don’t hold out thinking that you will achieve a sale price that represents this value. There are all sorts of reasons why the final sale price will be different from the theoretical valuation. It is, however, a useful benchmark. Some reasons why there is a difference may include:
Market conditions – recent trends, industry dynamics, or economic conditions. Technically the valuation process should have addressed these market dynamics. However, you may get lucky a have a business high in demand and as such you can command a premium. The opposite also applies. You can see then that timing is an important consideration when selling your business.
Negotiating skills – if you know your business and industry inside and out, you are well placed to put coherent arguments about why your business is worth what it is you are asking for it. It pays to get ready to negotiate.
Buyer’s motivation – there are many different reasons why buyers buy. I have sold businesses to competitors who simply want to put competition out of business. Synergies are often argued as a major reason for purchase but are often hard to achieve in practice. There may be geographic or strategic advantages also.
Seller’s motivation – all businesses sell, it simply depends on where the needle is pointing. If you want to get out in a hurry, you may price the price keenly for a sharp sale.
The due diligence process may uncover findings that adjust the buyer’s expectations regarding the price.
As you can see, the eventual sale price may be different from the theoretical valuation for a host of reasons. This cuts both ways, you may get less than the valuation, but you also may get more!
Lesson Two – Are you market-ready?
Once you have determined what your business is worth, you need to determine whether you are market-ready. This involves understanding and getting on top of a host of areas of your business. This doesn’t mean you have to have everything tidied up and ready to go, but it does reduce the risk a potential purchaser may see in your business. Some matters to consider if you are market-ready:
Financial – is your financial data up-to-date, accurate, and in a form easily understood by a potential purchaser?
Operationally – have you streamlined your business processes, identified areas for improvement, documented key policies, procedures, and processes, and mitigated any operational risks that could devalue your business?
Legal – all legal documents are in order, business names, IP registrations, contracts, customer terms and conditions, insurances, and staffing agreements in place.
Customers and suppliers – well-documented customer and supplier profiles.
Planning documents – including strategic or operational plans.
There is more that can be added to the list here but you get the idea. The more organised you are the better. Reducing the barriers or tensions created when a potential purchaser comes along may be the factor that gets you that better deal.
This is only part of the market-ready story. There may be some restructuring or improvements you can make to your business. These are the bits and pieces that you have on the agenda but have not quite gotten around to. Now is the time to get these done. One last push. It could make all the difference.
Remember – your business should be structured such that it is ready for sale at any time.
Lesson 3 – Who will buy?
After you have decided what you are worth and whether you are market-ready you now need to sit down and work out who your potential target market is.
Where is the buying coming from?
You will see the many businesses for sale on the many businesses for sale websites. The first thing that captures your attention when you jump onto these websites is the number of businesses for sale. One after the other after the other.
You need to stand out from the crowd.
So, if you think you’re going to get the right attention by simply listing your business on these websites, think again. The only winners here are the owners of these websites.
Buyers are likely to come from a source known to you: a competitor, a supplier, an employee etc. You do want to capture those on the fringe. The sources are likely to be:
Competitors – I have read recently that a lot of businesses are struggling with real growth. Inflation does increase revenue numbers, but this is not real growth. One way to grow or leapfrog revenue is to buy a business.
Employees or Management – This is always an obvious solution. It pays then to make sure you get the right people in your business. Provide the right training, reward systems, and culture to ensure this option is kept alive. Potentially a low-friction sale.
That Entrepreneur – this is that individual who can see the potential and identifies with your business as having good growth prospects or a good client base, possible scalability, or general alignment with their financial and non-financial objectives.
Industry Brokers – in some industries, specialists exists to match buyers. This is a useful source as often these buyers are already qualified. They are useful because they deal with some of the tricky issues like financing, understanding valuation models, and legal issues.
Networks – a good network of advisers, professionals, industry players, and influencers is a good way for your business to get exposure and expand your reach.
Online market – I have already expressed a view about these business-for-sale websites. It will pay to do your research here to make sure you adopt the online market service that best fits your audience.
