When to Sell Your Business

Check out this recent article from Smarta on how to time the sale of your business:

In Silicon Valley, business acquisition is commonplace – and the sums involved can be astronomical. In 2013, Yahoo bought microblogging platform Tumblr for over $1 billion, and Facebook recently acquired Oculus VR for a staggering $2 billion. Most company takeovers are far more modest. However, the decision to sell can be difficult to make, regardless of the size of your business.

You may want to sell your business for many reasons. Two of the most common are:

– You feel unable to continue running a business due to old age, ill health, or other commitments.
– Your sales are declining, and you’re seeking for a profitable way out before the business runs into the ground.

It’s highly unwise to wait until you’re too busy or ill to run a company. Selling a business can take up to 2 years – you’ll need a considerable amount of energy if you want to negotiate the best deal.

It’s also inadvisable to wait until your business is in decline. Business owners often wait for a miracle to save them when profits are decreasing, during which time the company can hemorrhage money and lose value.

The key to getting the best price for your business is to be proactive – never wait until the company is in trouble. However, money is only half of the story – your personal life should also influence the decision to sell. Here are some of the best personal reasons for selling your business:

– When you’re no longer passionate about your business – even if it’s making a profit. As any entrepreneur will admit, it’s almost impossible to channel enough time into a business if you don’t enjoy it.
– When you’re looking to make a lifestyle change, such as retiring or spending more time with your family.
– When there’s a profitable or enjoyable opportunity you’d like to explore, but your time and money is locked up in your current business.
– When you’re mentally prepared to sell your business. Handing over the reins can be surprisingly upsetting, especially if you’ve been at the helm for many years.

Not every business sale is provoked by personal change. Some entrepreneurs are guided by profit, choosing to sell when a lucrative deal can be made. If your aim is to make as large a profit as possible, you should pay close attention to the lifecycle of your company. Each business goes through a certain number of stages of growth and development, and these can seriously affect the value of your company.

Startup Stage
It’s virtually impossible to sell a business at this stage. You have a fledgling company with no existing customer base, and potentially no viable product. An estimated 80% of businesses never make it past the startup stage, so investors aren’t willing to take the risk.

Early Growth
You’ve survived the dangers of the startup stage, and have demonstrated the viability of your business model. However, a lot of work still needs to be done – your customer base will still be small, and any profit you make will be modest. It’s rare – but not unheard of – for businesses to be bought out at this stage.

Established Stage
You’re starting to reap the rewards of your initial hard work. The business is making a decent profit, it’s seeing considerable growth year-on-year, and you have an established and loyal customer base. This is often the most profitable time to sell your business – investors are looking for successful companies which will continue to make money with minimal input.

Mature Stage
Mature companies are also relatively profitable to sell. Investors are looking for further growth potential – often achieved by trimming the inefficient areas of the business. If your company has matured, keep a watchful eye on the market and your competitors – you need to sell before profits start to decline.

Decline
It’s still possible to sell a business which is in decline – some investors specialise in turning failing companies around. However, you will have a much smaller pool of potential buyers to negotiate with, and your business will be far less valuable than it once was.

The growth stage isn’t the only factor affecting the value of your business – wider economic issues can dramatically alter the asking price:

If the market is performing well, there will be a wide range of potential buyers to choose from, and you’ll be able to negotiate a high price for your business. The company’s profit records should also look healthy – a magnet for investors.

During a financial downturn, banks can be reluctant to lend money to investors – leading to fewer potential buyers. However, you could still sell your business for a respectable sum – investors will be looking to invest in something which could earn them more than the paltry bank interest rates.

Many entrepreneurs don’t advocate riding out poor market performance and waiting for ‘the right time to sell’. If your business is profitable, and you have an interested party, you could still benefit hugely from a sale.

There are certain hallmarks which savvy investors will look for, regardless of the state of the economy. If you’re seeking to make a large profit, it’s wise to build up some of these assets before you attempt to sell your business:

– A large, solid customer base. If your business relies on a handful of customers, it would only take the loss of one or two to completely derail the company. Investors will recognise this is a high-risk situation – to attract the best offers, build your customer base.
– Knowledgeable staff. If your own personal expertise is the founding pillar of the company, you’re unlikely to find a willing buyer – you need to reassure investors that the business will continue to thrive without you.
– Plenty of employees. In a large company, the loss of a few employees is of little consequence. To a small company, it can be catastrophic. To attract buyers, you need to build up an impressive staff portfolio – including capable managers.
– Brand value. Reputation is everything in business – if your company has an established and recognisable brand, an investor won’t have to put in too much work to maintain profitability. If your company is relatively unknown, they’ll need to consider the cost and effort of advertising.
– Solid financial performance. A business with increasing sales and wide profit margins is highly attractive to investors. If your company has performed consistently well for a number of years, you’re likely to fetch a good price.
– Flexibility. You’re more likely to attract a buyer if your business has more than one way of making money – if one market suddenly crashes, they won’t be saddled with a failing company.

Deciding when to sell a business is rarely easy. However, before you start the process, you should find out how much your company is worth. Always seek advice from a professional, as it’s easy to under or over-value assets.

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