At some point in the future I want to sell my company. So as the forward thinking entrepreneur I am, I went down the path of finding out what I need to be considering when preparing to sell my business. In the process I talked with 28 companies that specialized in selling businesses over a 4-month period and there were some consistent themes that came up.
Everyone wants to get the most amount of money and sell their business in the fastest possible time frame. Unfortunately short time frames and extracting massive value don’t normally go hand in hand. That’s why it is important to think about an exit strategy early on. What I discovered in my research were 6 critical things that entrepreneurs like myself needed to consider when selling their business.
- Not Understanding What Your Business Is Worth
Of the businesses that put themselves on the market every year only 5% of businesses sell according to Bizbuysell.com. This shows the gap between seller’s expectations and eventual selling price. The number 1 thing all brokers said when I interviewed them that stopped a founder getting their business sold was not understanding business valuation and having expectations of selling price that was too high.
The best way to determine what your company is worth is a comparable company analysis (CCA) that helps you determine what you company is worth compared to companies similar to yours. This approach looks at companies that are similar to yours and compares them to the sale of comparable companies. What your business is worth, is what a buyer is willing to pay for it. So having an understanding of what buyers are currently paying for businesses similar to your own will help you increase the probability of a sale by pricing your business at the current market rate.
- Not Having Clean Financials
Buyers use very simple methods to evaluate how much your business is worth, how much money they will return on their investment (ROI).
ROI is what drives the price paid for your business and if your financials aren’t able to show the profitability of your business well, not only will buyers think you make less money than you do, it also inhibits their ability to raise money (either through debt or investors) to buy your business. Having your financials prepared by a CPA, completing bookkeeping on a monthly basis and doing monthly reconciliations will place your business in a position that ensures it attracts the highest possible offers.
- Not Extracting the Owner
Generally, buyers are not interested in paying a premium for a business if the business relies on the owners for its success. Owners must delegate responsibility to key employees and involve key staff members in the decision making process. If you can demonstrate that your company’s success is a result of your employees and not solely you, you will be able to ask for a higher sales price.
When a business owner is the linchpin to any business, what a buyer is essentially purchasing is a job. Without the owner, the business would likely not operate, or operate poorly. It is a fact that the more process driven the business the higher the multiple. Extracting yourself, as the business owner from the day-to-day operations is the key to obtaining a higher multiple when you want to sell your business.
- Not Using A Broker and/or Advisors
It’s vitally important to have your deal team, which includes an M&A lawyer that specialises in selling businesses as well as your accountant. This may also include your financial planner as well. You will need all of these advisors whether or not you are using a broker to sell your business. Selling on your own is best if you are selling your business to a family member or employee. Utilizing a broker is best if you want to attract multiple buyers and get the highest selling price. Here are the top brokers I found in my research to sell your business
- bizquest.com – Best for businesses under $500,000 in yearly profit.
- businessexits.com – Best for businesses $500,000 to $20 million in yearly profit.
- sandleroneill.com– Best for businesses above $20 million in yearly
- Selling At The Wrong Time
Buyers are more enthusiastic about buying a business that is growing. A positive growth trend will allow a potential buyer to think they can make their money back (return on investment) in a shorter period of time. Let’s take two really simple hypothetical businesses (Business A and Business B) into account.
Business A makes $1m per year in profit and is not growing. Business B makes $1m per year in profit, but is growing 25% per year. Assuming growth rates stay the same, In 3 years time Business A will have a net profit of $1m. In 3 years time Business B will have a net profit of $1.9 million.
Over the 3-year period Business A produced $3m in profit and in that same timeframe Business B produced $4.75m in profit. This is why a buyer will be happy to pay more for a growing company.
- Too Much Risk For The Buyer
A buyer will be interested in evaluating the inherent risks in the business being acquired. If you can take away some of the risk for a buyer they will pay a higher price. Some things you may want to consider to de-risk your business:
- Is the business reliant on you as the owner?
- Do multiple people know key processes of the business?
- Are customers locked into contracts?
- Are suppliers under an exclusive agreement?
- Are you able to prove the income of the business?
- Will employees stay on after the sale?
- Is there any owner input after the sale?
- Is the revenue diversified?
- Is the customer base diversified?
- Is there any intellectual property?
- How transferable is the business?
If you can address these risk factors and take some of the risk away from the buyer, you will increase the selling price of your business.