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Although I normally recommend to my clients that they fully prepare to sell their business, sometimes it doesn’t hurt to see what you can get. It may be enough to pack up and leave to start a new venture in life.
Typically, my advisory clients go through a 2 to 3 year process of cleaning up the company and its finances to look its best for a potential buyer. The reason for this is that most people will ask for 3 years worth of financials when purchasing. By the way, during that "clean-up", it's most likely you will also end up profiting more than you did beforehand.
Don’t get me wrong about the time needed to prepare. I have also advised clients on a very quick prep and helped them sell when the business was less than a year old but these are just not ideal conditions for top dollar or speed. Three years or more of smooth, provable financials along with operational systems and processes in place is ideal to have a smoother transaction and sell for top dollar, but not always necessary.
Why sell your business?
Sometimes things happen and you just have to get out. Other times you are just ready for a change of pace. Your enthusiasm to build and work the business isn’t really there anymore. Seriously ask yourself if you are still at least 75% as enthusiastic about building the business as you were in year one or two when you started.
If you are like many people, you have put your best into the business for 3 to 10 years and don’t have the desire to make it any better, lack the skills to manage any more growth or you really are ready to move on to the next business you want to build.
Maybe it is time to just retire. That’s something you certainly have to ask yourself every year that you are in business.
Here are the best reasons to discretely put your business on the market and attract a buyer:
The truly best time to sell a business is when it is making good money and you don’t absolutely NEED to get out. This principle holds true for most things dealing with money: it comes much easier when you don’t desperately need it. Ask your bank when the best time is to go for a loan. I promise they will tell you “whenever it’s not necessary to have it”.
If you happen to be in a bad position like a divorce, partner dispute or illness then you probably can’t expect to get top dollar for your company. But, I promise you that you won’t get much at all if you don’t use professional help to sell. Smart buyers will see your desperation very quickly if they are dealing with you one on one because there is no buffer between you and them. You will be fighting a losing battle.
What’s involved in a valuation?
I’m sure you are just as curious as any other business owner as to what your business is worth in today’s market. The worst thing you can do is value a business yourself. The next worst thing is to ask your accountant.
Here is the simplest reason why this is a bad idea; you and your accountant have the same problem.
You both will figure out some way to paint the rosiest picture possible and then get mad at the fact that it won’t sell for that price. You love what you have built, and your accountant loves your money. He/she doesn’t want to make you mad, right? On top of this, a key ingredient in the pricing will always be missing. If you don’t have experience in the marketplace for your industry and area regarding business sales, you will never put that factor into your selling price.
Buyers will always value lower than sellers, but given the ability to completely name their price, sellers will typically be way off the charts on their value perception. This is not like selling a house. There are no apples to apples comparisons. An identical business that sold down the road for $500k does not mean yours is worth the same. It could be much higher or lower with revenues and net profit not being the only difference factors.
A company with revenues over $10 million and/or many big ticket tangible assets (like manufacturing equipment) should use a business appraiser to give them a true valuation. Any other smaller business is best to use a person in the buy/sell industry like a business advisor or business broker. I should point out that unless you are looking to shoot yourself in the foot on appraising and/or selling a business, DO NOT USE A REAL ESTATE BROKER. This includes a commercial real estate broker. They deal with buyers of buildings and houses, not businesses.
What’s the right professional help?
If you have a business with a building, have a real estate person properly appraise it then get a business broker to help you sell. This way you have true business sale experience on your side and you only pay commission for the business sale, not the building. Yes, a business broker will cost more in terms of a commission, but if you have a viable business, it will get sold and it is worth the money. Especially since the commission can often be built into the price so that you really don’t pay much of it out of your end.
When you sign up with a real estate broker, they tie you into an exclusive contract and then advertise your business as cheaply as possible (completely opposite of exclusive contracts with a business broker or M&A consultant). Why? That’s a simple answer. They don’t sell businesses therefore they don’t have buyers and they don’t want to spend the money to find qualified buyers in places where they are actually looking (hint: the newspaper is a horrible way to sell a good business).
Why should they? They make a living selling houses and buildings. They just happened to find a sucker to lock into a deal that they MAY GET LUCKY ON and stumble across a buyer making them money they should have never had. Don’t be that sucker. You are a smart business owner and you should know that you get what you pay for. If you have pride in your business, get help valuing and selling it from professionals.
And before you actually put your business on the market, get yourself a business advisor / coach that has experience in the business buy/sell process. This is the best way to prepare the business for a sale and get a high valuation. Some of the most profitable businesses are leaving money on the table in a sell situation because of operational and organizational factors that can make a big difference in the eyes of a buyer.
What should you do?
So here’s the bottom line. Unless you are extremely happy with coming to work every day at your business, consider selling it to a highly motivated (i.e. has the new venture fire), highly qualified (i.e. has the money) buyer and moving on to the next big venture. If you aren’t ready to sell, get a valuation done anyway to see where your company stands in the market right now. You may find it is worth enough to consider selling or you might find out that some work needs to be done to be able to sell in the future.
Either way, this will also maximize your income from the business and minimize your time spent working "in" the business versus spending more time working "on" it. This should be your goal no matter when or if you will ever sell the business.