Selling a business is a significant step. Growing a company from humble beginnings to the point where it commands a decent value takes time, effort and a bit of your soul. For many entrepreneurs, it’s like selling a part of themselves.
It is important to examine the factors that go into a sale before even putting the business on the market. Here’s what to keep in mind when selling your company.
What to do when selling your business
1. Consider your next act first.
Before even beginning the selling process, think about what you will do once your business’s sale is complete. The majority of entrepreneurs put an immense amount of time, effort and thought into their company. Once it’s sold, it might feel like there’s a giant hole in your life where the business once was.
If you plan on jumping into another venture, consider taking some personal time before doing so to see friends, family and colleagues, or take a vacation to your dream destination.
2. Assess personal and business readiness.
Before selling, be sure you’re making the right decision and aren’t acting too rashly. You should never feel rushed to sell. Make sure you, your business and your team members are in the right state before finalizing a deal.
Additionally, address any of your business’s weaknesses before negotiating a sale so you can increase its purchase price. Since it can be difficult to view your business objectively, ask employees or customers how you can improve your business.
3. Evaluate opportunity cost against life goals.
Every decision you make for your business comes with an opportunity cost. Consider what you will be giving up by selling it, including growth opportunities, as well as how selling will impact your career or personal life.
If you can accurately identify opportunity costs, you might impact the sale negotiations in a positive way. For example, if you feel that a sale would cost you the opportunity to work with a particular patent, add a sale provision into the contract allowing you to use the patent.
4. Show the true value of the business.
Take inventory of your business and accurately identify its value to ensure the final purchase price is adequate. Don’t forget to add the venture’s long-term potential to the final value.
To avoid bias, contract a third party to value your business. A third party’s evaluation will add an extra layer of transparency and legitimacy to the asking price.
5. Evaluate multiple potential buyers.
The more buyers that are interested in your business, the higher the bidding price and sense of urgency to finalize the deal will be.
When comparing multiple potential bids, consider the bid price, how the buyer will use the business, and what the purchase terms are. Don’t be afraid to consult a merger and acquisition advisor at this stage of the process.
FYI: Many auctions for businesses are yielding multiple bidders and causing auction jumping. Potential buyers submit bids prior to auction deadlines, subject to short confirmatory due diligence, to outcompete other potential bidders. This trend should continue.
6. Keep empathy and perspective.
Selling a business can be an emotional process. Buyers will view your business through a critical lens, and the truth can be hard to swallow. Don’t let the valuation of a business feel like a personal attack if the results aren’t what you expected. Rather, remain unbiased and clear-headed during a business sale.
7. Remember that people don’t pay for potential.
Include potential growth and long-term success in a business valuation – but don’t let that weigh too heavily. Buyers will be purchasing the business in its current state. Don’t tank a potential offer based on how you think the business might perform in the future.
8. Don’t fixate on the purchase price.
The purchase price is not the only factor in a business sale. Consider salary guarantees, stock payouts, installed payments, a future ownership stake and various sale provisions. Ensure you and your team view the final contract in its entirety.
9. Ensure your values align with those of the new owners.
Your business can feel like a reflection of who you are as a person. For this reason, you’ll want to sell your business to an entity that will carry on the legacy you’ve built. Find a potential buyer who will ensure the business maintains its quality, brand and mission statement. This is especially important if your name will remain attached to the business.
10. Help employees transition.
Consider how the sale of your business will affect your employees. Will they have new roles under the new ownership? Will they lose their jobs? Will their salaries change?
Formulate a deal that will be beneficial for your employees. If that isn’t possible, assist and support your employees during the transition as much as you can.
Did you know? There was predicted to be $4.7 trillion in deal value by the end of 2022, according to the Global M&A Report, making it the second-best year for mergers and acquisitions on record.
The best time to sell your business
It makes sense to consider selling a business when the following conditions are present:
Increased buyer demand
The market for business acquisitions and mergers fluctuates based on current events. For example, the COVID-19 pandemic caused business valuations to decrease, while demand increased dramatically. This created many cash buyers waiting on the sidelines ready to snatch up businesses.
Don’t try to time market conditions, however. This is virtually impossible. As a rule of thumb, If you happen to be considering a sale when the market is hot, it might be time to take the first steps.
Potential for higher taxes
The tax rate is never set in stone – Congress and the president can enact different tax rates to accommodate the state of the economy and country. These tax rate changes are typically proposed well in advance and take time to enact. If you foresee an increase in the tax rate, you might want to finalize the sale of a business before the increase goes into effect, as the sale is considered a taxable event and will impact your tax bracket.
A growing sales market
If the demand for your business’s product increases, consider listing the business. This increased sales potential will be attractive to potential buyers. Remember, don’t try to time the market; focus on having a solid sales record with demonstrated growth.
When the business needs additional resources
Sometimes a business simply hits a wall. The business might need new leadership or significant investment to continue growing. A business owner might consider selling the business if they are unable to make the investment or lack the required leadership skills.
If that is the reason for the sale, consider explaining this to the potential buyer during negotiations. You can alter a contract to accommodate the situation, so the sale is beneficial for both parties involved.
The desire for more personal time
Operating a business is more than a full-time job. If you are beginning to feel burned out and desire an increase in personal time, consider selling the business.
Remember, selling is not a sign of defeat. Time management priorities shift as life goes on. Maybe it is time to step away from the business for the sake of your personal and mental health.
When you need the money
The sale of a business will provide you with an influx of money. Sometimes, this is needed due to a sudden life change such as a health issue, divorce or impending retirement. You can also use the money to jumpstart a new business venture.
Don’t spend the money too soon, however. Take some time to consider your next move after the sale is finalized.
Additional reporting by Scott Gerber.