Whether you agonized before joining the family business or leaving a secure job to start your own company, deciding whether to sell your business is likely one of the biggest decisions you will make. The decision is a mix of numbers and emotion, hopes and economics, business and family. It is also made in the face of uncertainty. No one can predict what their competitors will do or whether the economy will be up or down at a particular point in time. No one can say for certain how their and their loved ones’ health will be in the future. Whether to sell can be a difficult decision, but knowing what questions to ask yourself can make the decision a little easier.
Why do you want to sell?
Sometimes people sell for the wrong reasons. Some sell because they think they don’t have enough capital, yet they haven’t explored all options for raising money.
Others sell because the business has outgrown their abilities, but haven’t tried bringing in professional management. Others don’t think their children are capable of managing, but they haven’t tried to hire an experienced manager to run the business and mentor their children. Some owners decide to sell because they have been told “the market may not be this good again.”
While that may or may not be true, some business owners find their work is their passion. If this is the case – and there are no compelling reasons to sell – you might be better off not selling your business even if it means missing the top of the market. If you love what you do, keep doing what you love. Even if you receive top dollar for your company, you might be unhappy not going to work each day.
It is crucial to understand why you are considering selling and whether other options might better achieve your goals.
Evaluate Your Situation
There are a number of personal questions to consider, such as:
- When would you like to retire? Even if it’s not in the next few years, you should start preparing now.
- Do you still enjoy your work? Do you wake up each morning eager to get to your business or do you think about the things you would rather be doing?
- What will you do if you no longer go to your business? Do you have other interests?
- How is your identity intertwined with your business? Do you define yourself as a business owner or in some other way?
- Do your children want to participate in the business? Do they have the skills and drive needed to run the company?
- What does the business mean to your family? Is your family’s identity tied to the business? Is it a tangible link to your family’s history or embody the legacy you wish to leave your children or is it merely a source of income?
Understand Your Emotions
Your emotions about selling may be stronger than you think and operating unseen. Your emotions will influence your decisions and help determine whether your sale is a success even if you are aware of them or not.
Some business owners walk away from a deal at the 11th hour, stating reasons that are not the real motivation for walking away, because they didn’t thoroughly examine their motivations for selling. Make sure you understand why you want to sell and whether or not you’re ready.
Otherwise, it is likely that you’ll go through a long, difficult process that could create uncertainty, worry your employees, and possibly damage your business – if you don’t sell.
Is the market right?
Is your industry on the upswing or in decline? Are a lot of businesses in your industry being sold? You must also understand how the economy affects your company’s value.
Typically, a down economy reduces value. But if you are in a recession-resistant industry, such as one that provides basic necessities, a down economy could increase your company’s value.
Understand the Value
If your expectations of value are too high, you might go through the entire sales process only to back out at the last minute because your expectations are not met. Set your sights too low, and you might jump at what sounds like a good offer but doesn’t pay full value. Even if you are not ready to sell, knowing the value of your business will help you to better plan for the future.
You need to know your company’s worth and what drives its value. What makes your company unique? Why do customers return? What gives you an edge? Does your company provide world-class service? Do you own patented technology or intellectual property? It’s difficult for most business owners to have an objective view of their company’s worth. You might miss some aspects of the business that are appealing to buyers or over-value others.
Understanding what makes your business unique will allow you to maintain your company’s value drivers as you position your company for sale.
Is Your Company Ready to Sell?
If you’ve decided to sell, look at your company through a buyer’s eyes. Examine every aspect of your business to be certain it is ready for sale. For example, the owner of a business whose sales were up 18 to 20 percent two years in a row, but whose bottom line was flat, was thinking about selling.
If the company had been sold under those circumstances, the owner would not have received compensation for the increase in sales, and might even have gotten a lower price.
A buyer might think this company is making low margin sales to increase revenues, thereby diluting its profit margins. Or, a buyer might wonder what’s wrong with the business, or whether costs are rising out of control.
By getting costs in line, cleaning up the business’s records – and correcting the operational issues that caused the margin decline – the owner was able to maximize what he received for the business.
Is Your Business Ready to Sell?
Are your books in good order? Potential buyers will be looking closely at your books and records, particularly during due diligence. They might use discrepancies to try to reduce the price. Make sure your records match your actual inventory, receivables are properly accounted for, reserves are accurate and your financial statements reflect economic reality.
Discrepancies will discourage buyers who feel unsure about what they’re getting. Or, a buyer might make an offer knowing there are discrepancies, take 60 to 90 days to perform due diligence and try to renegotiate the price.
Do you have a solid management team? How well could your company run without you? A strong management team is appealing to buyers and is an asset to you. If your business has an established management team, a buyer will see that the value is in the business rather than in you, freeing you to retire or go on to your next venture when the company is sold.
Do you have solid, diverse customer relationships? Make sure your company has strong customer relationships so buyers know what they’re getting. A diverse customer base will usually bring a higher price.
Deciding whether and when to sell your business is one of the biggest decisions you will make. But if you ask yourself the right questions, you can be confident you are making the right decision.