Knowing When to Sell Your Business: A Comprehensive Guide

January 10, 2020
Posted in: Uncategorized

Table of Contents

 

After putting your heart and soul into growing your business, you’re thinking about stepping away from it. Your personal circumstances and goals will ultimately influence your decision, but before making any moves, take a look at some of the reasons why selling your business may not be a good idea at this time. Next, consider the reasons why selling your business may be the best option for you.  If you decide to proceed with selling your business, you’ll learn what you need to do to get your business ready for the sale, the best time to sell, and what constitutes a good deal.

 

signing

 

Reasons Not to Sell Your Business

 

Before listing your business for sale, it’s important to be honest with yourself and determine if your business is in the best shape for selling. If you sell at a time when it’s not, the price and terms that you’re able to negotiate can be negatively impacted. 

Here are some of the common reasons why business owners decide not to sell:

 

Industry-Specific or Market Factors

Industry-specific factors can play a big part in when to sell or not to sell a business. Before seeking out a buyer for your business, consider the following:

  • Is your industry still experiencing growth?  Is the yearly growth rate in the double digits?
  • What are your competitors and colleagues doing? Are they selling or holding on to their businesses?
  • Is there a trend of general consolidation in your industry? Are the industry’s major players getting even bigger?
  • What are your margins like? Are you experiencing improved cash flows as a result of industry-specific cost and revenue motivators?

Your answers to these questions will give you greater insight into whether existing and anticipated industry or market trends are favorable.  If trends indicate that it’s highly probable the industry or market will continue to grow, holding on to your business may be the best decision unless you planned to sell it when you started it.

 

Opportunities for Growth 

If your business is in an industry where there’s a trend of consolidation, there’s probably little room for growth. The major players are likely gaining more and more of the market share. On the other hand, if your business is in an industry that’s showing signs of significant growth, you may want to hold on to your business. Maintaining ownership as the industry continually gains ground could provide substantial financial rewards.

Anxiety over selling too early and not reaping the benefits of the continual industry growth is a common concern among many business owners. They stress over giving the new buyer all of the benefits that could have been theirs.

Some business owners may devise a plan to grow their business by implementing a variety of advanced sales and marketing strategies.  If sales and marketing forecasts show the business experiencing tremendous gains in the upcoming reporting periods (quarters or years), holding on to the business until it’s reached its maximum value makes sense.

 

Tax-Related

As a business owner, you already know that Internal Revenue Service (IRS) mandates influence many of the decisions you make in operating your business. The federal and local government tax rates for your type of business affect not only your business decisions but personal financial decisions as well. 

If you don’t want to receive a lump-sum payment from the sale of your business and be hit with the resulting lump-sum tax, you may want to hold off selling. You may also be optimistic about future business tax rate reductions (part of a presidential candidate’s platform, perhaps?). You may have other personal financial reasons for not selling that aren’t tax-related, but taxes can definitely play a major role.

 

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Family & Personal Reasons

There are numerous personal and family-related reasons that may discourage a business owner from selling a business. Everything from the owner feeling too youthful to need a break from the business to family members desiring to keep the business in the family can hinder selling. If personal and/or family goals haven’t yet been reached, the owner may want to hold on to the business until they’ve been realized.

Although financial reasons are often given more weight in the decision to sell a business, the importance of family and personal reasons shouldn’t be minimized. These reasons can cause many business owners considerable angst in the decision to sell their businesses.

 

Business Costs

To maximize the selling price of a business, costs need to be effectively controlled prior to the business being put on the market. By controlling costs, the business’ bottom line and valuation are immediately boosted, making it attractive to potential buyers. Taking the time to cut costs and improve efficiencies is an ideal way to prepare your business for selling and ensure getting the best price.

Some business owners will forego selling until they’ve gotten high and unmanageable costs under control. They’ll focus on maximizing Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) so that cash flow is optimal and the business presents as a promising investment.  

 

Staffing Reasons

The sale of your business can be a difficult transition for employees. If you’ve established deep relationships with long-time and loyal employees, you may want to hold off selling your business until you’ve acquired a buyer who promises not to make substantial staff cuts after the deal closes. 

If you find that you need to sell your business for personal reasons but want your key employees to remain on board after the sale, you’ll need to structure the deal in a way that takes these employees into consideration. If your current headcount is too high for efficiency and EBITDA to be maximized, you’ll need to find ways to get other costs under control if you want to keep those employees on the payroll and make the deal attractive to buyers.

If your business has employee stock owners, you may hold off selling to an external investor and instead sell the business to one of your key employees.

 

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Legal Issues

If you’re a business owner with significant current or potential unresolved legal issues, you’ll need to wrap up any loose ends before putting your business up for sale. Pending litigation and other legal issues are factors that’ll make it difficult to sell your business. Potential buyers will not want to chance that your legal problems will become theirs. For the health of your business, you’ll want to resolve legal issues whether or not you choose to sell it. 

 

Risk Management

Besides the risk of litigation and other legal issues, there are other risk factors that could give buyers pause. Potential buyers’ concern over these factors could slow down the selling process. Depending on the nature of your business and the industry in which it operates, buyers’ could lose motivation if the following factors pose increased risk and/or cost: 

These factors aren’t necessarily deal-breakers, but their existence can play a major role in a business owner’s desire to hold off putting their business up for sale.

 

Succession Planning

Some business owners may put off selling their businesses if they find themselves without succession plans or potential successors. They may need additional time to develop a succession plan or wait until potential successors are old enough to train (for family-owned businesses) before selling and stepping away from the business.   

A ready-to-go succession plan can be a bonus from the perspective of the investor looking to buy a business without participating in its day-to-day operations. If the investor is only looking to acquire the business to reap profits and/or tax breaks, having an experienced management team in place can make the deal more attractive.

 

Business Still Provides Fulfillment

Financial reasons aside, if you still find fulfillment in operating your business, you may want to hold off selling it. If your desires when starting your business (autonomy, feeling of accomplishment, etc.) are still being satisfied, sticking with it may be your best option. 

Some business owners decide to sell when they’ve experienced burn-out and can’t bring themselves to come up with new ideas for growing the business. Should you find yourself headed in this direction, don’t wait too long to finalize your decision to sell. You don’t want to get to the point where you accept a less-than-optimal offer just to get out quickly. 

 

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Reasons to Sell Your Business

 

For all of the reasons why you shouldn’t sell your business, there are just as many reasons why you should sell. Business ownership can be challenging and some owners may find themselves in over their heads. Nevertheless, deciding to sell can be an emotional endeavor. For many business owners, their business is their “baby” and giving it up can be an emotionally-charged experience.

Here are some of the common reasons why business owners decide it’s time to sell:

 

Ready to Retire

Running a business requires a great deal of stamina in addition to capital. While in their prime, business owners are generally fueled by passion to accomplish all of the tasks required to successfully operate their businesses. Their reasons for starting their businesses provide the motivation needed to face challenges head-on. As they advance in age, the passion may still be there, but their decreasing stamina will hinder their ability to physically manage business operations.

With their sights set on retirement, these mature business owners will begin to work on an exit strategy. The farther in advance the exit strategy is planned, the more thorough it typically is. This advanced planning will enable the business owner to receive the most favorable offer for the business. 

 

Burn Out

After retirement, this is the most common reason for selling a business. If you, as the owner, are experiencing boredom, exhaustion, and general burn out, productivity will be negatively impacted. As a result, your company value will be diminished. When you’re no longer excited about going to work or starting new projects, it’s time to get out. It could be that you’ve lost interest in operating the business itself or there are changes in the industry that just don’t appeal to you.  

 

Illness or Family Issues

Unfortunately, there are events beyond a business owner’s control that necessitate selling a business. If the owner or a close family member is faced with a major illness, the owner may have no choice but to sell the business. Advanced planning is key to maximizing the price that can be obtained through the sale. By keeping the business at optimal operating efficiency (keeping expenses under control and maintaining healthy cash flow), it will be in a prime position to sell for top dollar. 

If a married couple decides to divorce and both spouses have ownership in a business, selling the business may be part of the settlement agreement.

 

Increasing Competition

When the economy is strong, this generally means increased revenues for business owners. This can also mean an influx of new entrepreneurs hoping to cash in on the encouraging economic climate. To remain competitive (and afloat), a business will need to innovate and adapt to the rapidly changing market. If the business owner is unwilling or unable to adapt to these changes, another option is to sell the business while it’s competitive and while the economy is strong. Doing so at that time will yield the best price and terms.

 

daschund

 

Need to Relocate

If you and your family have made the major decision to relocate and you operate a brick and mortar business (as opposed to an ecommerce business), that’s a good reason to sell your business. Although it’s possible to relocate your business along with your family, market conditions and industry growth in the new location may not be conducive to successfully operating your type of business. 

 

Need Cash for Another Business

Some business owners choose to sell their business because they need capital to start an even bigger business or one in an industry with more promise. If you’re planning to start another business that you feel will have a strong chance of producing more revenue than your current one and you don’t have the money to get it started, selling your current business is a viable option. Before selling the current business, make sure you’ve thoroughly researched the new business’ market and industry growth forecast.

 

It’s Part of the Plan

Especially in the case of serial entrepreneurs, some businesses are started or purchased with the long-term goal of being sold in a predetermined number of years.  Selling the business by the targeted sell date is part of the plan set by the business owner.

 

Financial Opportunity

If your business operates in a strong industry and at maximum efficiency (high revenue, low costs) you may receive offers to buy your business. Have you ever wondered why some highly profitable businesses are sold instead of being held onto by the business owner(s)? It’s likely that the owner(s) planned to sell the business when it was started or originally acquired. Selling a business for mega millions is the hope (and plan) of many business owners.

The offer to purchase your business could come from an individual buyer or from an investment group that’s impressed with how you successfully grew the business. The offers may be few and far between and dependent on your industry. When these opportunities present themselves, don’t be blinded by dollar signs. Take the time to thoroughly evaluate the opportunity and ideally engage the services of a sell-side broker to walk you through the details of the deal.

 

Poor Planning

Unexpected events are par for the course in the world of entrepreneurship. The business owner that fails to take steps to protect the business from them can find these events snowballing into full-on catastrophes. Business owners can become complacent with the way their businesses currently operate and neglect to consider the broad view. This oversight can cause harm to the business and necessitate its sale.  

Issues that could cause problems:

  • Declining industry – This trend is common in most industries at some point; however a business needs to take action to keep the business from becoming vulnerable.
  • Overinvestment of personal assets – When an owner overinvests their personal assets in the business, this opens the business and owner up to the possibility of bankruptcy.
  • All eggs in a few client baskets – If a business generates most of its revenue from a few clients, this places the business at risk should one or more of the clients seek services elsewhere.

Failure to take action to mitigate these issues can force a premature sale and result in a lower than anticipated sale price. 

 

business meeting

 

Once You’ve Decided to Sell

 

After carefully weighing the pros and cons, you’ve decided to proceed with selling your business. You likely put a lot of time, effort, and money into growing your business so your main objective is to get the maximum value for it. To do so, there are multiple steps to take and factors to consider. 

 

Get a Valuation

Once you’ve decided to sell, the first step is finding out what your business is worth. To receive viable offers, you don’t want to price your business too high because it won’t sell. If you price it too low, it’s like disregarding all of the resources you put into it. Key factors to consider in the valuation process are:

  • How much revenue is the business currently generating? How much will it likely generate in the future?
  • What’s the current profit margin?
  • Which channels bring new customers to the business?
  • What market position does the business hold?
  • What systems and processes are in place?

Just as a person looking to sell their home uses comps to arrive at a marketable selling price, part of the business valuation process involves reviewing the historical sales of similar businesses and comparing your business to them. You should have a professional business valuation done as it will be more favorably regarded by potential buyers and save you from future legal hassles. 

 

Will You Sell on Your Own or Use a Broker?

Selling a business can be a complex process but if you’re planning to sell to a family member or employee, selling on your own may be your best bet. On the other hand, if you want to attract multiple buyers to maximize the selling price, using a broker is the way to go. A business broker will help you with the valuation, prospecting, marketing, legal, and closing aspects of selling your business.

When choosing a broker, it’s ideal if they specialize in companies of similar size to yours. If they specialize in your industry, that’s even better.  If your business generates less than $500,000 in annual profit, Bizbuysell is a resource to consider. 

 

Prepare Documentation

Once you’ve determined your business’ worth and whether you need a broker, the next step is gathering and/or preparing the documents you’ll need to present to potential buyers. When considering the purchase of your business, buyers will want to see verifiable numbers and hard facts. It’s critical that all figures are accurate and actual. Buyers could use any incorrect or suspect information as leverage for lowering the selling price. They could also abandon the deal altogether. 

Documents buyers will want to see:

  • Profit and loss statements (at least 5 years’ worth)
  • Balance sheets (at least 5 years’ worth)
  • Summary of tax returns, bank statements, and merchant account statements
  • Business description
  • Summary of operations plan
  • Summary of marketing plan
  • Features/benefits of your products/services
  • Customer lists and customer sources
  • Articles of incorporation, if applicable

 

documents

 

Develop the CIM

Once you’ve gathered or prepared the necessary documentation, a Confidential Information Memorandum (CIM) (also referred to as the “book”) is drafted to present to potential buyers. This detailed document is generally prepared by the business broker and includes:

  • A detailed description of the business and its operations
  • A summary of the industry and opportunities within the market
  • Financial information including analysis of historical data and forecasts
  • Market trends and growth opportunities
  • Frequently asked questions about the business

The CIM introduces the business opportunity to potential buyers and helps them assess the business. Before it’s distributed to buyers, review the CIM thoroughly to ensure that the positive attributes of the business are highlighted to get the best terms and price. 

 

Find a Buyer

You want to find the most qualified buyer for your business. A broker or investment banker can pre-screen buyers to make sure they’re financially able to purchase your business. This includes reviewing available funds, sources of financing, and any judgments or bankruptcies filed. You also want someone with the business acumen and management experience necessary for taking the business to the next level.

You may also be interested in potential buyers’ reasons for wanting to buy your business. If the buyer is a company, having a track record of success and long-term employees is an indication that the owner is a good employer that inspires loyalty. Performing Google searches or searching public records for scandals and arrests is another way to screen potential buyers.

Ultimately, the best buyer is the buyer who pays the best price, has the best terms, and is the best fit for your business.  Here’s another real estate reference (although selling a home is different than selling a business) — sellers stage homes for maximum appeal and to get the best price. You need to “stage” your business by making sure your books are in order and your business’ strong points are sufficiently highlighted in the CIM. If you have a physical business location, you’ll also want to make sure it has “curb appeal” by presenting it in a clean and orderly condition.

Potential buyers can be employees, customers, vendors, private equity firms, high net worth investors, or even competitors. Listing your business opportunity in trade publications or newspaper ads is another way to get the word out. There are also websites that specialize in connecting business sellers with buyers. A business broker, however, can confidentially approach potential buyers in their network on your behalf. 

Keep in mind that people buy businesses for different reasons so your sales approach will need to be adjusted depending on the reason. Generally, there are two types of buyers: strategic and financial. Strategic buyers are concerned with how well your business will fit into their company’s long-term plans whereas financial buyers are more interested in your company’s profitability and stability. Financial buyers typically want to buy well-managed businesses that require little oversight.

The more prepared you are, the more likely you’ll have a successful outcome. 

 

Review Offers

An offer will generally come in the form of a letter of intent (LOI) which is a formal offer to buy your business. As the seller, you want the LOI to be as detailed as possible concerning the key issues of the deal. It should contain the buyer’s identity, offer price, financing terms, non-compete terms, exclusivity, and closing timeline. It should also contain post-sale support terms so that you know what’s expected of you after the deal is finalized. Once the LOI is signed and an exclusivity negotiating period has been granted to the buyer, the buyer will have the upper hand in negotiations. To get the best deal, you want the buyer to think there are competing bidders. 

Once you accept the LOI, the buyer is allowed to perform deeper due diligence where the claims that you made about the business will be verified. The LOI isn’t a contract for sale but instead a nonbinding sales agreement. 

 

meeting

 

Buyer Due Diligence

To verify the claims that you made, during the due diligence period a buyer may request bank statements, merchant account or credit card processing statements, in addition to current and historical financial statements. You may also need to provide your business systems and processes, customer lists, employee list, and the names and contact information for suppliers.

Some buyers may want to dig deeper and ask to interview employees, clients, and subcontractors. They may also want to review the contracts that suppliers and employees have signed.

 

Review the Sales Contract

After the buyer’s due diligence is completed, a formal offer will be made or the deal will be passed on if it didn’t pass due diligence. If the buyer is interested in purchasing your business, a contract for sale will be prepared and presented to you for review. The contract will outline all terms of the deal and list all assets being sold. It will also contain the non-compete, training, and support terms.

 

Close the Deal

Once you and the buyer have negotiated the fine points of the deal, scheduling the closing of the sale is the first stage of a multi-stage closing process. At the closing, the sales contract or agreement will be signed by all parties and the process of transferring the business begins. An escrow transaction is set up using an attorney. You and the buyer then review and agree on the escrow transaction terms.

The buyer sends the agreed-upon funds to escrow and the escrow service confirms receipt of the funds. During an inspection period, the transfer is confirmed and after the buyer confirms, the escrow service releases the funds to you, the seller. 

If the deal includes post-sale training, the buyer begins training according to the schedule established in the sales agreement. 

 

Post-Sale Training and Support

It’s standard practice to assist the buyer in learning the specifics of the business operations after the deal closes. If you sell the business and aren’t staying on as an employee, the new owner will need time to get acclimated to the systems and processes involved in running the business. 

The training period can last anywhere from a few weeks to a few years depending on the length that was negotiated as part of the deal’s terms. 

 

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Best Time to Sell Your Business

 

As mentioned earlier, the most common reason for selling a company is that the business owner is at or near retirement age. Illness is also a common factor in a business owner’s decision to sell. These are, however, some of the worst times to sell a business.  Selling a business is a formidable task as there’s a lot involved in the process. An elderly or ailing owner will find it difficult to deal with the additional stress and may be taken advantage of by the buyer as a result. 

So, when is the best time to sell a business? The right time to sell is when you’re in good physical condition and have a profitable business to sell.  Your company should have a consistent history of growth, with a relatively large growth trend (considering your industry) in the most recent year. Growth is a key component that buyers will look for.

You don’t want to sell at a time when you’re facing physical or financial hardship. For example, if you sell for the following reasons, you’ll be in a better position to negotiate the best price and terms: 

  • Need capital to start another business
  • Planned to sell the business when you started it
  • Received can’t-pass-up offer to buy the business

 

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What’s Considered a Good Deal?

 

Of course, as someone seeking to sell a business, you want to receive the best possible price. However, there are other factors that are equally important to many business owners. Below are terms that can sweeten the deal.

  • A quick sale – Some business owners care more about timing than price, especially in cases where the owner is selling for reasons like poor health or relocation.
  • A confidential sale – To protect the business, its employees, and vendor relationships, many business owners prefer that the selling transaction remain confidential.
  • An all-cash transaction – To avoid the rigorous financing process, many sellers are willing to accept a lower price if a potential buyer offers all cash. 
  • Ethical successor – For some sellers, their businesses are their “babies” and they care about who will be at the helm once it’s sold.  They may turn down a great financial offer if the buyer has disagreeable ethics.   
  • No earnout clause – Sellers often find earnouts difficult to understand and problematic post-closing. An offer that doesn’t include an earnout clause is preferred by many sellers.
  • Favorable tax considerations – After selling a business, an owner wants to be responsible for the least amount of taxes.  There are several scenarios that should be considered and negotiated with a buyer that will affect the taxes paid by the seller. A CPA should be consulted prior to listing the business for sale. The CPA can advise the owner regarding the type of sale that will result in the least amount of taxes. 

 

Final Thoughts – Knowing When to Sell Your Business

 

For whatever reason you decide to sell your business (this article covered several), being prepared and selling at the right time is the best way to ensure receiving the maximum price and best terms. For extra assurance of receiving the best deal, it’s highly recommended that you hire a sell-side broker or consultant. This professional can help you establish your business’ worth and guide you through the daunting process of selling your business. 

 

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