As with most things in life, timing is a major issue when selling a business. Proper planning and timing will impact the ultimate purchase price in a major way. Both external and internal timing factors weigh on considerations of when it is best to sell a business.
The worst situation to encounter is a forced sale of an unprepared business in a difficult economy. Many businesses in these situations simply close their doors after failing to find a buyer. Even in good times, as many as 30% of all businesses for sale do not sell. Planning and preparation are important to the business owner.
Factors Beyond Your Control
External and market forces that influence the sale of a business include economic conditions, interest rates and conditions in the industry of the specific company. Low interest rates mean purchasers can find financing more easily. Also, they may see money invested in a business offering better returns than their savings generate.
On the other hand, tough economic times make it tough to find qualified buyers. In such situations, sellers decide to wait, accept lower prices, or work with purchasers by providing seller financing. The important thing is to understand business cycles. Whatever the conditions today, expect things to be different in two to three years and plan accordingly.
The most difficult situation is failing to sell at the peak in your industry. If you have a video rental store, the parade probably has passed by. The best time to sell is when a trend has a product or service as a “hot” property. This also makes it easier to sell and it offers the best chance of cashing out on top.
Things You Can Control
Many owners are so busy running their businesses that they fail to step back and look at many details that bear on the value of the business. The ideal approach is to have at least one to two years to get finances and operations in the best possible condition for a sale.
Psychology is a major part of attracting the right buyer. If they see an efficient operation with financials in order and all the paperwork handled, you start negotiations with things in your favour. When circumstances allow a year or so to get ready, there are a number of simple steps to consider.
Honest Business Assessment
The first thing to do is bring in a trusted adviser for a confidential assessment. A mentor, your accountant or a savvy business broker provides a fresh eye to critically evaluate every aspect of the business. Set pride and emotions aside; pretend they are buyers looking for a bargain.
Attempting to get an initial valuation provides a guideline for a potential sales price. It tells you if selling the business will give you the return you expect. You may decide to invest a few more years to increase that valuation.
Make Sure the Financials are in Order
Almost every small business has to dress up their financials for a sell. Dealing with issues of owner compensation and benefits is a first step. Many decisions that make for good and legal tax planning affect how an outsider sees the business. Any owner loans or benefits need evaluation with your accountant.
Inventory and Maintenance
For many businesses, inventory and equipment are major assets. Planning for fresh and proper levels of inventory takes a couple of seasons to accomplish. Proper cleanliness and maintenance of equipment, with appropriate documentation, provides the best valuations.
Of course, all your company paperwork, such as licenses, permits, leases and taxes need to be in order for a sale. These items take time, and the more prepared you are, the easier the sales process.
Timing is essential to the sale of any business. Take steps to have time on your side and you will maximize the return you receive.