Business owners often begin with the end in mind. Because of this, it should come as no surprise that one of the most frequently asked questions from business owners today is, “When should I sell my business?” Of course, there are many factors that go into answering this question, and the specifics will be different for each business. One guiding principle remains the same across all industries and businesses, from the coffee shop on the corner to the manufacturer company down the street. The best time to sell your business is when things are going well. When your business is successful, the economy is strong, and you are ready to move on—that is the best time to sell your business.
This might sound counterintuitive, but the best time to sell your business is when business is going well. Many business owners, when experiencing a financial incline, decide to ride out their good fortune and continue working and growing their businesses. While it’s understandable to want to stay with the business in a season of success, it may also be a risk. It’s hard to predict when sales may start to drop, when a competitor moves in, or an unforeseen expense comes up. To make the most in your sale, sell when your business is doing well.
The valuation of a business is often determined by analyzing three years of tax returns, balance sheets, and profit and loss statements. While the current year’s numbers are the most important, potential buyers that see an upward trend of profit over the course of time will inherently place more value in the business. Buyers are also looking at your client base. If anyone customer accounts for thirty percent or more of your overall sales, that could be a red flag. On the contrary, a more diverse client base, with no one particular customer or client making up the majority of the business, increases your potential value as well.
Another area to consider when deciding to sell a business are the employees. Occasionally, owners looking to sell may shift their focus away from hiring and managing employees. This could be a costly mistake. Often, experienced managers and professional staff become a great selling point during the marketing phase of the sale. In addition, strong relationships with employees can often facilitate smoother transitions from owner to owner, a feature that ultimately increases your business’s value in the eyes of a potential buyer.
This point seems a bit more obvious. The best time to sell your business is when the economy doing well. Strong economies can be indicators of future business success. They also have the added benefit of equipping buyers with the motivation and funding to purchase a new business. The local economy, industry trends, and market conditions should all be analyzed before you decide to sell your business.
The local economy can give buyers insight into the potential for future growth. Study local trends and consider whether they demonstrate a future demand for your business. According to Census Bureau estimates, Dallas and Houston rank No. 1 and No. 2 in the nation respectively, for the number of people relocating to the area annually. One estimate suggests that almost 250 people per day are moving to the Dallas metro area, and Houston isn’t far behind. These numbers suggest continued growth over time, a strong indicator of a flourishing economy.
Industry trends are also an important factor in the sale of your business. Potential buyers want to clearly see a need for your business, and the value it can add to the existing industry. Research the trends of your industry and what can affect it, positively or negatively. Then time your sale to coincide with a period of industry growth. For example, selling a real estate firm during a housing boom would be a profitable decision, while listing a luxury car dealership at the height of a recession might not make financial sense.
Evaluating market conditions is another essential part of determining when to sell your business. Over the last several years, we’ve experienced times of great economic growth and periods of difficulty. While it may be hard to predict future downturns in the economy, market forecasts can provide a relatively accurate look at the potential for growth. Selling in the midst of a recession will almost always result in a decreased sales price. In times of economic growth, however, buyers are more likely to take financial risks and have easier access to capital, which can increase the overall purchase price of your business.
Successful business owners have a goal mindset. Whether you wanted to get to one million in sales or you set out to become the leading landscape architect in the city, you started your business with a goal in mind. Once those goals are reached, maybe even surpassed, it might be the right time to sell. In addition to getting the most out of the sale of your business, moving on after goals have been reached may set you up for future success in your next venture.
Approximately half of all privately owned companies in the United States are owned by baby boomers. If you fall into this category yourself, you may be thinking about retirement. Business ownership is rewarding, but it also comes with hard work, long hours, and stress. Plan ahead to have a retirement you can enjoy. Calculate what you’ll need to live comfortably in retirement, and consider selling when you reach that goal.
Entrepreneurship is in the heart of every business owner. It’s what made you take the risk to start your own business in the first place. If you aren’t nearing retirement age, you may have other projects on your mind. You might want to take what you’ve learned in your first business to develop an entirely new business or product. If you have researched your new venture and the time is right to make a move in that area, it may be time to sell your existing business.
If you are a business owner looking to sell your business, begin by understanding the potential value of the business. Consider selling when your business is in a period of financial growth, when expenses are low, and when you have a strong team of employees around you. Decide if the time is right by studying the economy. From the strength of the local economy to industry trends, economic factors weigh heavily on the price of your business. In addition, sell when the time is right for you. Whether you plan to retire or you have your eye on a new venture, factor your future into the equation. Lastly, sell when everything is going right. This ensures the best valuation of your business moving forward.