Selling a business is one way to cash out of many years’ time and effort. Business owners have many options for structuring a sale. To negotiate from a position of strength, consider the following four action steps before putting the business on the market.
- Know why you want to sell. Are you ready to retire? Are you bored? Do you want to cash out and do something else? Do you see the market for your product/service changing dramatically? Do you want to take money out of the business but stay involved? Knowing what’s next for you helps you make the other decisions that are critical for getting the best price.
- Understand the value of your business. Businesses generally sell for a ‘multiple,’ which varies by type of business and/or industry. Multiples are based on multi-year trends of revenues, profits, and EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization). Many tangible and intangible factors create the value of your company. Consider the range of hard value of assets to the soft value of strength of management team or market position. Talk with a financial counselor in your area who is familiar with your business category for help with determining value. It’s important to have a resource with perspective of other business sales.
- Plan ahead. Knowing that you want to sell your business gives you a different mindset about operations. Make a list of things you can do that will make the business more attractive to a potential buyer. For example, stop running personal expenses through the business that make the numbers look less profitable. You may get a tax write-off, but it doesn’t help the business. Also, clean up your financials. Some business owners run businesses out of a checkbook. Switch to an accounting system such as QuickBooks and use the reports to help you determine profit by product or service. Depending on the tasks, you may start the plan to sell a year or more in advance of actually selling the business.
- Know the terms and/or transition plan that you’re willing to accept. Talking with a professional who deals in business sales and acquisitions will help you determine various scenarios for the sale. Options include money up front, earn-out payments, and/or staying with the company for a time of transition. If you’re willing to stay with the company, define your role, parameters, and compensation. It may be difficult to watch someone else take the company in a different direction or make decisions that you don’t like. Plan in advance how you will handle various scenarios – what’s negotiable, and what’s not negotiable.
There are many ways to structure a business transition. A Salmon Sims Thomas business advisor is a helpful resource when considering a major change such as selling a business.