by Chris Gilmer
I would hazard a guess that most every business owner at one time or another has thought about the idea of selling their business. Business owners have all kinds of reasons for considering a sale. Some owners sell the business as their nest egg for retirement. Others may be bored running their business and may like the idea of being in startup mode so they are seeking a new opportunity. They may be passing ownership on to a son or daughter in order to keep it in the family. Savvy owners will always consider a sale if the price and timing are right, so it’s important that the business is ready to sell. Whatever the reason, there are many things owners should consider before they sell.
Let’s start with some general information about selling a business.
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Approximately 1 out of 5 businesses actually sell. (The number is lower if there are fewer than 5 employees)
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75% sell for much less than the owner desired.
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Baby Boomers (of which I am one) often sell their businesses in order to have enough money to retire.
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Some business owners don’t think about selling their business until they are desperate and that is probably the worst time to do it.
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You should plan at least 12 – 18 months ahead to sell your business and preferably 2 years.
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Most owners have little or no experience selling a business.
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Average duration to sell a business is 4 – 8 months.
Putting a Value on the Business
The single biggest concern for owners is what price they can get for their business. There are a number of ways to estimate that value: asset value, PE ratios, annual sales, profit, book value, to name just a few. In the end, the value of a business is based on what someone will pay for it. That is why it is important to plan ahead and strengthen your business results to make your company more attractive to future buyers.
Let’s focus now on gaining that optimum value and some of the things you should be thinking about in order to maximize your sale price. You will need to hire people who understand the process and can help you ready your business for sale (business brokers, lawyers, and business advisors). The value of the business needs to be looked at using some of the value methods above to first establish a range for the price of the business. There are plenty of other factors that can adjust the price but the most impactful is the buyer’s perspective. From the buyer’s side, is this a strategic purchase? Is there a particular product(s), trade secret, or intellectual property that they want? Is the buyer a competitor who is trying to expand their market and eliminate you as a competitor, or from outside your industry (or geography) and looking to buy your customer list to develop new markets? It will benefit you to obtain as much information on the buyer as you can and try to understand why they are interested in your company. This knowledge will help improve the possibility of pushing the price to the high end of the “range of values” so you make more on the sale.
By planning ahead for a potential sale you can also improve the things that may reduce the value for the buyer. Like any investment, an owner must weigh the cost to fix an issue with the increased value it may provide. This could be things like a weak management team, high account receivables, cash flow problems, excess inventory, or low profit margins to highlight just a few. Owners should always be managing these areas but they are even more critical before a sale as it can impact the selling price of the business.
Finally, one more piece of advice; never try to hide something from a buyer as they will most likely find it during the due diligence process. Finding issues as a surprise could end the deal or have a larger negative effect on the price than if it were pointed out up front. It is much better to disclose the issue and prepare a plan to present how it can be resolved with the right resources or talent that maybe you don’t have today that the buyer does.
Needless to say these are far from the only considerations around getting optimum value selling a business, but it hopefully gives you a lot to think about and act upon today that will most likely bring value in the end. The best news is if you decide the price isn’t right or just decide not to sell, you are left with a stronger business that will hopefully generate more profit.
Chris Gilmer is a certified small business advisor and President of Gilmer Consulting LLC. Reach him at cgilmer@oedadvisors.com
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