Selling A Business? Here’s what you need to know
Over the next decade, baby boomers will continue to retire and with that hundreds of thousands of businesses will be up for sale. Selling a business is more of a process than a task and the time it takes is unpredictable.
Why does selling a business sound appealing to you?
Retirement is one of many reasons an entrepreneur decides to say goodbye to their business. There are three instances when a business owner is selling their business:
- Your business is in trouble and fighting for its survival. In such cases, continuing the business carries countless risks, and so before the value completely disappears, the owner puts it on for sale.
- You get an attractive offer when you are not ready. You might not be expecting it, but offers, when the business is at its peak, can be quite high. If you do not act quickly enough, the offer goes away. So it requires some quick thinking.
- You are thinking the time is right, and you’ve simply decided to sell. This happens in almost 20% of all business selling situations, as it provides plenty of time to think over offers and prepare the business for sale.
Selling a Business – How do you prepare?
In an interview with Dr. Tom McKaskill, we learn how best to prepare your business for sale to get the best possible price and value. Dr McKaskill is a global serial entrepreneur, educator, author and angel investor. He is an authority on how entrepreneurs start, develop and harvest their ventures.
Five tips he recommends for entrepreneurs selling their business are:
Target the buyer
Dr McKaskill recommends that sellers put themselves in the shoes of the buyer. Figure out who the best buyers are and find out what values are important to them in a business. Once you have targeted a buyer, mold your business towards them. You need to make the business look similar to ones operated by the buyer already because you want to make it very comfortable for them to acquire it.
Create value for the buyer
There are different kinds of potential buyers in the market, but your business does not attract any one kind. Your business might represent different value components to different buyers. So perhaps one buyer might be solely interested in the employees, another might be after the intellectual property, or somebody else might want the office location or customers.
Rather than focusing solely on the business being very profitable, look at how it can create new value for the buyer. They will look for what the highest possible returns they can get. A business owner may not have fully exploited the potential of the business. Presenting facts and evidence of possible potential can be of great interest to buyers. They are focused on generating and extracting value from a running business.
Sell the future
Another thing Dr McKaskill emphasizes is focusing on the future of the business. The buyer is not as interested in what you’ve done with the business, but rather what the business can do for them in the future. He said, “It’s the buyer who’s going to explore the potential of the business. You’re gone. You’re mostly out of the business. And whatever you’ve done in the business, that’s history. So when we sell a business, we sell the future of the business. We never sell the past. So now we ask ourselves how do we create a great future for this business that the best buyer will execute on?”
Hire a good quality advisor.
Dr McKaskill says that hiring the services of a quality advisor is “absolutely critical.” But in his experience he has seen many professional advisors stuck in conventional methods of valuation from decades ago. The problem with them is that they are focused on the past. They evaluate the history, profit and historical growth of the business and project it forward.
You need to find an advisor who understands that it’s all about creating value for the buyer. Past performances of the business reflect your work, but since you’re no longer going to be there, it should be able to continue creating value for the new owner.
Very few people have sold a business once. It’s even rarer for people to have sold more than once. Chances are you’ve never been in a room with a buyer negotiating a deal before and don’t know where the buyer is coming from. A good quality advisor who negotiates multiple times a week and creates great exit value for their clients would be a great asset in helping you secure a good closing deal.
These tips are scalable to small and medium businesses, whether it is a local shop or a sole proprietor. No matter the size of the business, the business owner needs to create value for the buyer. They have to concentrate on what the business looks like going forward. How reliable are the projections of revenue and income? What are the risks associated with the business? It will fetch a higher value if it is reliable and has lower risks.
Many small businesses are all about the personal touch in their relationships with clients. When the founder who personally built and managed the business leaves, a large part of the value goes with them. To help transition clients and the new owner with the move, document your knowledge and have a succession plan made for employees. A reliable transition plan for buyers can make it an attractive sale.