So it’s time to head for Margaritaville, or maybe you’ve outgrown your business, or it’s outgrown you – whatever your reason it is time for you to exit your business. But you have put time, effort, tears, and cash into your business and you need to sell it and reap your reward. The following are a five questions you should ask yourself before selling your business:
1) Is the business about you?
Some businesses and some business owners are so intricately tangled up in the day to day business or the businesses reputation that it becomes difficult to sell the business. If this sounds familiar then read on!
You need to ask yourself when was the last time you were away from the business and didn’t need to frequently check in? If you can’t think of a time or it’s been awhile then the business depends on you to function properly. If you plan to sell it then you are going to have to make adjustments on the way you operate this business so it doesn’t depend on you. A big reason a buyer will want to buy a business is that they are buying a proven business system that they can learn and replicate. That is why franchise businesses are popular purchases for many business buyers as they come with a well-defined business system. If you want to attract a buyer you need to systemize your operations including introducing/strengthening written operating policies and procedures, strengthen your employee training program, and empower employees to make some of the decisions. If you do this before you sell the business then your business will be more saleable.
Another way the business may be about you, is when the reputation of the business depends on you. This sometimes happens with businesses that have none or few employees because the owner becomes the face of the company. This isn’t an insurmountable problem but you will likely have to plan on a longer exit with you being involved in some capacity after the sale so that your client’s trust can be transferred to the new owner. And if the business is named after you (or your family) you may want to consider a name change well in advance of selling the business.
2) Is the business profitable?
This might seem to be an obvious question at first but it may be a little more complicated than at first blush. The business needs to have an accounting profit (on the income statement) and a positive cash flow in order to be truly saleable. Your buyer will need to show the bank that there is net income in order for them to borrow money to buy your business. And if you want to maximize the value of the sale, you will want to show a larger profit (and yes – you’ll have to pay some tax on it!). You can increase your profit by eliminating unnecessary expenses in the year or so before you sell your business.
On the cash flow side you should collect any delinquent accounts or write them down/off sooner rather than later. Going forward you need to work on making sure that your receivables are collected promptly. A buyer is potentially going to look at the age of your receivables as a measure of the quality of your customers and business.
3) Why would someone want to buy your business?
You love your business but why would someone else want to buy it? This is an exercise in imagining your best buyer for the business. Here are some questions you should ask yourself: Would they want to keep the business the same or change it? Does your business represent a new market or you’re their competition they can buy? Is your business a lifestyle that someone else would want, and if so who?
If you can imagine who might want to buy it and who you can target those people with your advertising and sales messages regarding your business sale.
4) How much would someone be willing to pay for this business?
Because you have put so much time, effort and cash into your business it is hard to see the value the same way that a potential buyer sees it. At the end of the day your business is worth what someone is willing to pay for it. But there are ways to find a reasonable asking price for the business. The majority of businesses are priced on a combination of the value of the equipment, inventory, sales, and profit. Different businesses and industries have different standard methods of valuating businesses within the industry. Professional businesses (accountants, lawyers, etc.) usually are valued based on a multiple of sales whereas a retail store might be valued based on sales, equipment and inventory.
When valuing some businesses its worth contracting a professional business valuator to do the work. But if you want to the work yourself you can start by searching for the standard valuations in your industry on the internet. For many industries there is a standard or preferred method. Whatever method you choose you should be ready to justify your price to a potential buyer.
5) Do I know of anyone that might want to buy my business?
If you have done the work from question #3 you’ll have a much better idea of who might be interested in buying. You should start looking for someone to purchase the business within your network of contacts and then move out from there.
Connect4Commerce offers entrepreneurs and small business owners across the country a convenient and comprehensive place to connect, exchange goods and services, and advance their businesses. Be sure to check out further articles in our Business News blog for additional business tips and resources. Also, find professionals on our site that can help you with your business sale and we can help to market your business and get it sold.