The decision to sell is one of the biggest decisions in a business owner’s life. This guide is designed to help with the decision making process. Specifically, we discuss how to establish your sales goals, evaluate the worth of your company, and ultimately decide if now is the right time for you to sell your company.
Establish Your Personal and Business Goals
You should first evaluate your personal and business goals. This helps you determine if (and when) you should sell your business.
Personal Business Goals
For example, your personal goals may involve spending more time with your family, achieving a less stressful lifestyle in an effort to protect your health and well-being, or traveling the world now that your kids are grown. Whatever the case may be, your personal goals should play a key factor in the decision making process of selling a business.
Financial Business Goals
Of course, your business and financial goals are also important. For example, you may feel as if you can significantly improve your company’s value in the coming years (see valuation information below). In other cases, you may desire to maximize your worth immediately by selling your company as soon as possible.
Discussing Your Goals With Family and Business Partners
We strongly recommend discussing your personal and business goals with family members who will also be impacted by your decision to sell. Their input can help you feel more comfortable with whatever decision you decide. Of course, a discussion with your business partners (if applicable) is important as well.
Considering The Timeline for Meeting Your Goals
Lastly, it helps to consider the timeline for your sale. For instance, is it important to sell fast or are you in a position to wait months for the right offer? Ultimately, you should establish your goals and determine how long it takes to reach them.
Evaluate The Worth of Your Company
It is important to understand the value of your company before you decide whether you should sell. Your valuation plays a critical role in planning your exit strategy goals. For instance, if you receive a high valuation that you know will allow you to comfortably retire and live the lifestyle you desire, then selling may be the best option for you.
Additionally, a professional business valuation from a business broker can help provide leverage in negotiations when you do sell. This is because prospective buyers know they can trust the value you have provided and should come up with similar valuations when they conduct their own research. A professional valuation also helps avoid unpleasant surprises once you begin receiving offers, and you can quickly screen offers and discard the ones that are well below market value.
What is a Market-Based Business Valuation?
There are different types of business valuations. Namely, the types include a market approach, asset approach, and income approach. A market-based business valuation (market approach) is a way to determine your company’s worth on the market. In other words, this is the amount a reasonable buyer is willing to pay for your company. There is a lot that goes into a market-based business valuation. Specifically, your business broker will consider your:
- Seller’s discretionary earnings (SDE)
- Growth potential
- Competitive advantage
- Reason for selling
Your broker will examine your financial information to formulate your company’s value. For instance, they will review your federal tax returns, profit and loss (P&L) statements, and balance sheets. Ultimately, they determine your SDE and apply it to rule-of-thumb data for your industry. Non-financial information that may impact value is also considered, and adjustments are made accordingly.
When You Should Consider Selling Your Business
There are many reasons to consider selling your business. Every business owner has their own reasons for considering a sale. For instance, someone may simply feel burned out from the work it has taken to build their company. In other cases, the business owner may simply want to pursue other business ventures. Some of the more common reasons to consider selling your business include:
- Partnership disputes
- Financial concerns
- Health issues
- Changing interests/priorities
- Family reasons
- Regulatory changes
- Competitive pressures
If you are planning a sale, then you should make sure that you can receive the value that allows you to reach your long-term personal and financial goals. If you are able to reach your post-sale goals and feel good about leaving your company, then it is likely the right decision to proceed with the sale.
When You Should Not Sell Your Business
Not every business owner who is considering selling should go to market right away. In many cases, it is best to improve your valuation first and wait for more favorable market conditions. Also, it may not be the right decision to sell if you still have plenty of energy and passion for what you do and are not ready to let go of ownership. Specifically, you should consider not selling your business if one or more of the following are true:
- You believe in your business’ long-term potential
- You have a strong passion for your business
- You are unable to secure a fair sales price
- The market is not right to sell your business for fair market value (FMV)
Many business owners hold off selling their company due to an emotional attachment they have formed with their company. In fact, many owners view selling their business the same as they do send a child off to college; it is simply hard to let go of something you love so much. A fear of employees losing their job and a possible negative impact on the community leads many to stay in an ownership role.
While these are common reasons for not selling your business, there comes a time when letting go is the right decision despite the emotional attachment and fears. Due to this, it is best to have discussions with your family and focus on what is most important for you when making the difficult decision to sell or not to sell.
The Business Sales Process Explained
It helps to understand the business sale process before you begin. Although there are differences within each sale, there are common steps. First and foremost, you should make the decision about selling (or not selling). As discussed in detail, this includes determining your company’s value with a market-based valuation. If you decide to move forward with the sale, then the process may include the following:
- Planning and preparation – this involves planning your sales goals, including your asking price and non-financial goals (i.e. find a buyer who has experience within your industry). You should also collect your company’s documents, such as your tax returns, insurance policies, and business licenses.
- Finding a buyer – Once you are prepared, your broker should find a buyer via private and confidential marketing channels. You will also put together your sales memorandum during this stage, along with screening offers, negotiating with prospective buyers, and securing a deal with a signed letter of intent (LOI).
- Due diligence – The buyer has the opportunity to request documents, conduct a review of your business processes, meet with employees, etc. This allows them to confirm the details of the purchase before they close the sale.
- Closing – You will review the purchase document and attain the final signatures at the closing table. You will also confirm the payment has been sent during this stage as well.
- Business transfer – Last but not least, you will assist with the transition of ownership according to the terms agreed to beforehand. Some business owners are only willing to provide a month or less of transition assistance, whereas other business owners may be willing to help for a year or more.
The Importance of a Business Broker When Selling Your Business
Your business broker plays an important role in selling a business. They do far more than connecting you with potential buyers. In fact, they also help you with the decision making process of selling a business. Specifically, they should provide you with an idea of how much you can receive in a sale and help you make informed decisions accordingly.
Once you decide to sell, then your broker also helps you get fair market value or higher. They make this process easy, handling all of the complex details for you. Moreover, your broker should maintain the confidentiality of the sale. This means news of your business sale is never leaked to the public until a buyer is secured and the sale is closed.
On the other hand, selling without the assistance of an experienced business broker often leads to a stressful and unsuccessful process for business owners. Prospective buyers may try to get you to sell for below fair market value, or the privacy of the sale may not be maintained. In other words, working with a business broker simply makes life easier and less stressful when you plan and execute your exit strategy.
Speak With an Experienced Business Broker About Selling Your Business
The business brokerage team at Sigma Mergers and Acquisitions can help you make the difficult decisions about selling your business that you have worked hard to build over the years. We offer free, no-obligation business valuations to help get the decision making process started. So, why wait? Contact us today for more information and to schedule a free consultation.