By Dave Richards
As a business owner, you may have struggled to determine when is it the right time to sell your businesses for its maximum value. This actually is a very personal decision with several areas to consider. If you're thinking of selling a business, here are five key questions to ask yourself:
1. Is my business growing, staying flat, or declining?
Businesses with sales and profitability that are growing at rates of 10 percent or greater provide an outstanding opportunity to capture a premium. The business trends over the last three to five years are a key factor prospective buyers look for and greatly influence what buyers are willing to pay.
In contrast, businesses which have remained relatively flat do not necessarily generate the same level of interest as high-growth businesses. These businesses, however, are generally good businesses for a buyer to consider if they offer market potential and provide an opportunity for a new buyer who is willing to explore new avenues to grow the business.
Finally, businesses that are trending down often get passed on by most buyers due to the risks involved unless the problems are easily identified and the path for turning things around is clear. If this is the case for your business, you should either spend the time and energy to get things back on track or be prepared to accept less money.
2. Am I still motivated to operate my business?
I have represented many business owners who own strong businesses and have developed reliable business models, but lack the energy or motivation to continue to operate at maximum levels. Simply put, they have held onto their businesses for too long. Burnout is very common and understandable; the key is to recognize it before it's too late.
I have seen many businesses sell for less than 50 percent of the value they might have received if the owners had tried selling before starting a second business, or before hiring a manager who ran the business into the ground.
3. Do my financial statements and tax returns reflect the profitability the business actually makes?
When marketing a business, a good business broker will typically recast the financial statements to account for discretionary and/or nonrecurring expenses which are run through the business. This practice is very standard and most buyers realize that not all profits show up on the bottom line of the tax returns.
Some adjustments such as owner's compensation, personal auto, personal medical insurance, retirement plans, etc. are easy to identify and can be added back to the bottom line without a lot of dispute from a buyer. However, strategies such as unreported cash or pushing revenue from one year to the next is often not an accepted add-back by a buyer or his bank. I strongly recommend that business owners take a more arm’s length approach to tax planning and maintain a clean set of books at least two years prior to selling their business.
4. Is the majority of goodwill tied to me or my business?
A buyer wants to make sure that a business will continue as usual when they take over. I have found that when an owner of a business maintains most of the relationships with its customers, the business is much more difficult to sell compared to businesses where the employees are responsible for sales and/or maintaining customer relationships.
If sales for your business are primarily the result of your personal efforts, the majority of goodwill is tied to you -- and once you exit the business, so does the goodwill. Therefore, it's important for any goodwill to be tied to your brand. Ensure you have a strong management team and solid systems in place.
5. What will I do after I sell my business?
I represent many business owners who are looking to retire. For many buyers, retirement is often perceived as a great reason for selling as many buyers believe retirement is the only valid reason for someone to want to sell a good business. I have found, however, there are many valid reasons why owners decide to sell their business. I also have found that business owners who know what they are going to do after they sell their business are much more committed to the process and are much more likely to achieve favorable results.
For many of you, your business represents one of your most valuable assets. Often, the thought of selling is scary because you have invested so much of your time and effort into building your business. I have found that not only do you need to be emotionally ready, but your business also needs to be in position for sale. Once both of these are in place, you should interview and find a reputable business broker to represent you in this important process and help you achieve the best possible results.
