Sometimes the dream of owning your own business changes over time – maybe you don’t want to be a business owner anymore, or maybe something has come up in your personal life that doesn’t allow you to continue. You may have spent years or even decades building your business, giving little thought along the way to ever selling or leaving it. Eventually, the moment may come when you begin to think about it, but you’re still not sure if the time is right. The decision to sell or leave your small business is very personal, but it’s also influenced by several factors.
Are You Ready to Sell?
When you consider all the practical issues of selling your business, you explore your own readiness, both financially and emotionally. In other words, you want to be confident and comfortable in the decision you make. At the same time, selling your business could be the answer to your retirement security. It’s always a good idea to consult with a financial professional to determine the most tax-efficient way to take money from the business or to calculate the spend-down rate of your capital. This information helps to ensure your income can sustain the lifestyle you’ve come to know. The most critical issue to consider is your emotional attachment to the business. Selling your company without thinking about how you’re going to spend your time might lead to regret in your decision. Creating a life plan or pondering exit strategies provides you with several options. Perhaps consider – is your business ‘sellable’? Is it a business that’s currently in-demand?
Is Your Business Sellable?
As you assess the ability to sell your business, consider the vantage point of a potential buyer. If you were in the market to purchase a business, is this the type of business you’d buy? Then, focus on eliminating any reasons a purchaser might give pause and accentuate the positives. Aspects of your company a prospective buyer most likely to take into consideration include:
- Profitability: focus on the trend. Is your industry one that’s on the way up or on the way out?
- Solvency: The less debt, the better. Do you owe any large debts? Are any large debts owed to you with no certain potential for collection?
- Market position: Is your business a leader in your industry?
- Management/employees: Do they add to the value? Would they stay with the company if you no longer owned it?
- Customers: Size, diversity, loyalty, and growth potential. Do you only have other small businesses as customers or clients? Or do you have large contracts, such as governmental agencies?
By viewing your business through the lens of the buyer and understanding factors they consider when determining if they want to buy and at what price, you can concentrate your efforts on improving those aspects of your business. These changes have the potential for immediate and visible impact on its value.
When Is the Best Time to Sell?
The best time to sell a business is when the market peaks, but the market’s not something you can necessarily control. Your business might be doing well, but other factors in the market or the economy could negatively impact the value of your business. When you start thinking about selling your business, focus on what you can control and put your energy and resources into managing your business the way you would if you had no plans of selling.
Speaking with a business consultant can help you decide the best time to offer your business for sale, and one consideration is your business’ future prospects. The consultant can help you gauge the state of your industry and, based on current business, assess where your business is likely to be in five years. If the odds are good business could substantially increase over the next few years, you may want to hold off on offering it just yet.
On the other hand, if a major highway currently under construction might funnel business away from your location, selling the business before a drop in foot traffic leads to declining revenues is an option. Plans for what to do with the money from the sale may also influence your decision. If your plan is to reinvest in a new business, determine the best time to make that investment, as it can impact your decision when to sell your current business. If you’re looking to use the sale proceeds to fund your retirement, you can meet with your financial adviser to see if the money you receive from the sale is adequate enough to maintain your financial goals in retirement.
When you decide to sell your business, planning the sale well in advance usually brings a higher price and gives you time to take steps to maximize the business’ value.
Maximizing Your Sale Price
Preparing to sell your small business has some crucial aspects, such as getting an appraisal. You can estimate the value of your business by looking at its assets or its sales, but it’s also advisable to have an independent business appraisal. Obtaining appraisals from more than one business valuation company is good sense because there can be substantial differences in the value assigned to your business by different firms. Consider using a broker for the sale to ensure fair treatment and that proper legal procedures are adhered to.
A long-term preparation to consider is hiring entrepreneurial-minded employees who may be inclined to think about someday buying the business from you. This can make for a relatively quick, easy sale without much difficulty in getting a fair price. Take steps to brighten your company’s financials, such as collecting past due accounts receivables and cleaning up your inventory. Have extensive documentation of your business’ assets, inventory, customer base, and supplier information, in addition to basic records of profits going back several years to show prospective buyers. Include any long-term contracts that guarantee income for the business. The best time to sell a business is when it has been performing at a high level and future prospects look good for enduring profitability. Whenever you decide to sell, you can command a higher price by taking steps to maximize the value of your company.
What Exit Strategies Exist?
Knowing the different ways to leave your business can maximize your advantages. Choosing the best exit strategy allows you the greatest financial rewards while minimizing risks for yourself and your heirs. Some methods even let you maintain an interest or participation in the business while reducing your time and resource commitment.
Simply Sell It Outright
If you believe your business has growth potential but you’re not interested in growing it yourself, consider selling it. Find someone skilled in operations who can take it to the next level. Finding a buyer can be challenging if your business is new, small, or unprofitable, but the greater the growth potential, and potential buyers might come to you.
Be prepared to share a lot of information about your business with potential buyers, including financial statements and tax returns going back at least three years; lists of assets, inventory, employees, and customers; details about outstanding loans, debts, and leases; and the names of outside professionals, such as advisers, lawyers, and accountants, who are familiar with your business. A variety of internal and external factors determine the value of your business and the timing of the sale can be important.
Turn It Into a Source of Residual Income
If your small business provides you with a steady stream of revenue, would it continue to do so if you turned over the reins to someone you trust? What if you want to retire or move on to another project while still maintaining ownership of the business? How about taking a share of the profits or even a salary? This is a good option that allows you to keep your business intact and often entails less risk than other options.
For example, if your business has an established customer base and sells products or provides services that don’t require constant innovation and change, it’s relatively simple and low-risk to hire a competent manager to oversee the day-to-day operations for you. You can then spend your time on other things while making yourself available as a consultant or adviser.
Merge Your Company with Another Business
If your company serves a market that’s similar to another business, consider merging with it. Larger businesses looking to grow often want to buy small businesses to increase their market share, round out their pool of talent, or otherwise leverage what your business has to offer. This can be a great way to cash out with relatively little to no risk, and sometimes you can even stay on as a consultant.
Transform Your Small Business Into a Publicly-Held Company
Taking your business public with an IPO — an initial public offering of your company’s stock — is another option. The process is complex and can be costly, and you and your business could be closely scrutinized by various interested parties, including accountants, lawyers, regulators, industry experts, and the media. Your potential liability is high, but if your company is well-positioned for an IPO, experts are available to guide you through the process. You could reap large profits while still maintaining some semblance of ownership.
Liquidate Your Company
Sometimes it’s best to just dissolve a business. Liquidation is sometimes an alternative. Have you recently filed for bankruptcy? Does the potential for a collapse in revenue or profitability exist? These things happen and are usually due to some unforeseen external event, such as an environmental catastrophe or major regulatory change. How you go about shutting the doors depends largely on your business’s legal structure, as particular legal and tax considerations apply to each type of business.
Even if you’re not looking for an exit now, it’s a good idea to have an exit strategy for down the road, especially if you have an innovative product that could make your business an attractive candidate for outside investment or purchase.
When Is it Time to Sell Your Business?
Learning when the best time is to sell your business, and what conditions can make the transition ‘just right’, can help you decide if you should sell, merge, or simply continue with business as usual. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.