What can I do if I am thinking about selling my business?
Selling a business requires careful planning over an extended period of time. Interestingly enough, many small business owners fail to plan for the sale of their business, perhaps due to the time constraints that come with running a business. Nonetheless, ~88% of businesses being sold under $500k do not plan for the sale prior to selling.
What’s more, 45% of businesses valued $5 million and below have not planned for a sale before selling. There is much to consider when contemplating the sale of a small or medium-sized business, and the advice in this article will point you in the right direction. The benefits from proper planning are certainly worth it, as an informed seller will save time and money.
Currently, we at Tsetserra Growth Partners are exploring the opportunity of acquiring established and profitable businesses in the small to medium-sized range ($3.5-$12M/year in revenue). Industries that we prefer include manufacturing, logistics and distribution, hospitality, business services, real estate services, and more. Moreover, we appreciate a diverse and growing customer base, an identifiable layer of non-owner management, as well as identifiable competitive advantages. Throughout this process, we have realized that every individual business has unique factors associated with that particular business.
By no means does this article contain everything worth reflecting on, however, our intent is to share some useful thoughts and considerations that are beneficial for both buyers and sellers to be aware of alike.
First – Why Are You Selling?
The first thing you have to ask yourself is why you want to sell in the first place.
- Are you preparing for retirement?
- Are you burned out?
- Is a bad financial decision driving the sale?
- Are partners or exterior factors pushing you to sell?
Next, be sure to seek out other people who have sold their businesses and ask them if they regretted the process they went through or were able to enjoy the fruits of their labor after the sale – in order to help get some meaningful perspective. The best way to develop a greater understanding of what selling your business will mean to you is to take the necessary time to ask those around the process they experienced.
Here is a little more information on the process we tend to run when working with a business owner exploring the sale of their business: Our Process.
Second – Set a Timeline of Expectations, beginning the End Goal in Mind
Setting a timeline can help you work backward establishing benchmarks to reach before the deadline of selling.
1. The work you are doing now will show its results in 2 to 3 years from now. If your goal is to sell your business in the next 2, 5, 10 years from now, remember to look for indications in your industry of change and remain nimble. Allowing ample time for your business to pivot, creating greater value through the sale.
2. Key is to not take your eye off the ball. It may be a natural reaction to let off the gas and start coasting, however in this next season of your business now and possibly more than ever before is the crucial moment to continue to grow and create continued momentum.
Third – Know Your Exit Strategy
Develop a complete exit strategy, including who your ideal buyer is.
1. If you had to dream up your ideal scenario for your business after you are no longer running the ship, what would that look like? Would your preferred buyer be anyone with a checkbook, or a trusted partner who needs your systems and technology to grow their own business? Maybe your buyer is someone that has a completely different set of skills and experiences from you, but is perfect to take your business to the next level. Be specific in what you are looking for. This is your legacy and you have the unique change to consider its future.
2. Key this ideal buyer in mind, by perpetually having this top of mind when the time comes to decide between multiple buyer interactions and offers the process will become that much easier.
Forth – Increase Value of Your Company
Think about it like selling your house. Investing money to improve your house before a sale can net you more money on the back end. It’s often this concept that is transferable to the sale of your business. There are many ways to increase the value or quite simply create the perception of increased value.
1. Be prepared to explain your company’s story in order to attract your ideal buyer. What goal did you have in mind when you started the company? What are some meaningful benchmarks that your company has reached over time? This goes beyond a great pitch deck. Your story needs to be reflected throughout your entire business, the physical location, your website/digital presence, current marketing materials, and your people – one of the greatest opportunities to increase value for your business is to show the business is on a pathway to continue greatest, rather than a buyer walking into a confusing mess.
2. You could hire a CFO who has experience with these types of transactions in order to streamline your business allowing for greater effectiveness in managing current cash and assets. Ensuring your financial records are neat, orderly, and able to be packaged in a way that makes life much easier for the buyer will only allow for a smoother process when they are evaluating your business.
3. You could also improve your sales force with updated technology to drive growth and subsequently improve your company’s valuation. Providing a clear blueprint for driving sales will increase the value and ultimately net you more money.
4. When you sell your company, you will need to show the buyer the entire picture of the company. Get on the phone with your attorney today, and have them bring all your contracts and agreements into one place to get ready for a sale. These contracts equal money and security, the revenue will be there when you are no longer the owner. It is important to remain up-front and have documentation ready to share.
5. Lastly, it is important to clearly document all of your processes and systems. Not only does clear documentation provide the transparency that instills confidence in buyers, but it also provides the opportunity to look for improvements in the coming years. Essentially, the buyer will be able to better make adjustments to the business following a sale, given that there are clear financial documents, as well as information regarding processes and systems.
Coming up with several growth opportunities that the buyer can take advantage of immediately is extremely helpful, that said be prepared to explain in detail how you see the business being able to achieve that milestone. No buyer wants to pay for the work they are about to put into the business, so be sure to explain how you have made it possible for them to be successful.
Fifth – The Negotiation Process
The time has finally come!
There are two ways the negotiations can go down: The owner sells the company themselves or they hire an M&A Business Advisor to shop the business around to potential buyers.
One thing to be clear on is in both routes there will be other involving parties in order to get the task across the finish line. In any case, there some key advantages and potential disadvantages when considering how to processed:
- Without soliciting help from a business advisor, it’s likely a buyer connects to you through a mutual connection in your network or an individual in your industry. Many times these are the best buyers – the entire process happens organically through multiple conversations where everyone involved is excited about the match.
- Rather than potentially going back and forth on the value of your business, it’s likely those that have previous experience buying or selling a business may help give you a more accurate market valuation for your business. This will allow you to be more confident and prepared to have conversations on the sale of your business. An accurate market valuation supported by third party comparables will save time and money later in the process.
- Business Advisors potentially have a greater rolodex of likely buyers to present your business in front of. That said, there is the potential that you will need to have more high level conversations in order to build the necessary level of trust to complete the process of selling. Rather than starting conversations with someone that you already know.
Sixth – Companies are Bought Differently
When it comes to the sale of your business to an outside buyer there is the potential for multiple types of offers and different pieces that will be brought up as negotiation points, here are a few:
1. Paid completely for the business at the time of sale, no additional time commitment after a short training period, no industry-related non-compete – this is fairly rare.
2. Paid out the majority of the value of your business with some held back for a short period of time combined with no seller financing offered to the new owner, after roughly 60-120 days of related training with no charge to the new owner a salary is offered to you for continued help as a consultant to the business, a non-compete within your related industry for a term limit of a few years – this is more common.
3. Paid out the large portion of the value of your business with some held back for a short period of time combined with some financing offered to the new owner either as rolled over equity or debt (seller note), roughly 60-120 days of related training with no charge to the new owner, a non-compete within your related industry for a term limit of a few years – this is the most common.
All of the aforementioned points are extremely important to begin thinking about far before the sale of your business.
If you made it to this point in the article, you now have enough information that will equip you to get ahead of the vast majority of those considering the sale of their business.
Interested in selling your business? We provide a free market valuation of your business as well as additional resources and guidance about the process of selling your small business.