When To Sell Your Business
Whether due to retirement or new business opportunities, there comes a time when every business owner will have to sell the company to a new owner or step down and let a new management team take charge. But how do entrepreneurs know when it's time to step away? How should they plan their exit strategy? How can you extract the most value from your existing business without impacting the bottom line or the overall value of your business?
Read on to recognize the signs that it might be time for you to start preparing for the sale of your business.
Is It Time to Build an Exit Plan?
Personal and financial events may prompt entrepreneurs to hire a business broker and start lining up potential buyers for a business sale. In most cases, small business owners are looking for more liquidity and cash flow that the current business cannot provide. Selling the business is a way to generate more cash flow to fund whatever endeavor the seller has planned next. What are some of the reasons that a small business owner may start to seek prospective buyers?
Retirement
At some point, most entrepreneurs will want to retire and relax after years of hard work. The liquidity of a business sale can fund that retirement even if a business owner has been actively saving for retirement for years. Depending on the sale price, a successful sale could enable younger business owners to become financially independent and no longer work.
Invest in a New Venture
In some cases, a business owner wants to pursue other business opportunities or endeavors that the existing business cannot satisfy. Selling a business can raise the necessary capital to invest in a new business opportunity. It may also afford the seller a chance to pursue other life aspirations, like continuing education or travel.
Take Advantage of a Great Offer
Sometimes great offers come out of nowhere. If a business broker gets an offer that is significantly above the business valuation, it might make sense to sell, especially if it’s likely that the market value of the business will decline in the future.
If interest rates are high or the sale could positively impact tax returns, it might make sense to take advantage of a short-term sale. Always contact a certified public accountant (CPA) and financial advisor for any financial and tax issues related to a business sale.
Slowing Growth
Growth is typically fast during startup years but can dramatically slow as the small business starts to stabilize. If the balance sheet is looking less positive than it was in years past, it might be time to seek out potential buyers.
A M&A (mergers and acquisitions) advisor could connect business owners of larger companies to private equity buyers who typically inject capital into companies with lagging growth to generate immediate cash flow. The private equity firm will conduct due diligence on your company and establish a business plan with new metrics to maximize market value.
Burnout
Burnout is a state of overwhelming physical and emotional exhaustion that occurs when a person no longer has the energy or drive to meet the demands of their job. Burnout is extremely common in entrepreneurship, and while it’s possible to overcome it, the best course of action is usually to step away.
If an entrepreneur is burned out, they can often cause more harm than good to their existing business and jeopardize the health of the bottom line. If you know you’re worn out, it’s time to start considering a succession plan.
Partner Owner Disputes
If the management team no longer sees eye to eye, it might be time to consider an exit strategy. Co-owner disputes and divorces are common examples of partner disagreements that could push a small business owner to sell.
Personal issues like divorces add time pressure, forcing the seller to settle on a sale price quickly and move on to other opportunities. In these cases, a certified business broker, CPA, and lawyer are all necessary to ensure a smooth business sale.
You’ve Decided to Sell: Now What?
While the process of selling a business is long and complex, there are a few first steps you can take to prep your business for sale.
If You’re Retiring & Have a Succession Plan
Transferring ownership to employees, a family member, or management team that is part of a prearranged succession plan is generally simpler than selling to a brand new owner. In this case, your business can just buy you out, leaving you to simply work with a CPA to figure out the tax implications.
If You’re Seeking Outside Ownership, Consult an Advisor
Business brokers both play an important role in preparing the business for sale. They organize company financials and liabilities, prepare a confidentiality agreement, and spruce up sales and marketing resources. Depending on the type of business, a business broker may also recommend renovations to the existing real estate.
For larger businesses, an advisor can contact private equity firms or other strategic buyers to set up a more complicated transaction.
(To learn more, see What a Business Broker Will Do for You.)
Get a Valuation and Start Getting the Word Out to Prospective Buyers
Whether working with a business broker or going the FSBO route, small business owners should get a business valuation and set the initial asking price for their business.
With the help of a Confidential Information Memorandum (CIM), which the seller only shares with interested parties, the seller can start to identify, vet, and coordinate with prospective buyers.
Deciding when to sell a business is a big decision, with many considerations. Once you’ve evaluated your options, make sure you plan time to get the business ready to sell. This will ensure you’re able to maximize the value of your business and negotiate the best terms.