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Deciding whether to sell your business is a big decision that requires careful consideration of many different factors. While we can’t make the decision for you, as entrepreneurs ourselves, we can provide you with some information to keep in mind so that you can make the most informed decision possible when asking yourself, should I sell my business?
1. The Right Timing
Timing can significantly impact the success and value of a business sale. As a business owner, you should research the current market conditions, industry trends, and demand for businesses similar to yours. If the market is favorable and there is high demand for businesses in your sector, it may be an ideal time to sell. Here’s what to consider in terms of determining if the timing is right to sell your business.
- Your personal circumstances. It’s important to consider your personal circumstances when asking if selling your business is right for you at a specific period of time. Consider your exit strategy and how selling the business fits into your long-term plans. If you have a clear vision for your post-business life or have other ventures you want to pursue, selling the business may align with your overall strategy and other personal factors. Look at factors such as when you want to retire, your short- and long-term financial goals, and how much cash you’ll need to fund your retirement. You’ll also want to factor in other sources of income besides your business. You should also assess whether you are still passionate about the industry and if the business is meeting your lifestyle needs. If you’re looking for a change or seeking more work-life balance, selling the business might be a viable option to achieve your personal goals.
- Market conditions. If the market conditions are favorable and there is a strong demand for businesses similar to yours, the timing of a business sale can greatly impact its success and value. This is why it is important to thoroughly research and assess current market conditions and industry trends. Understanding the market dynamics will help you make an informed decision about whether it is an ideal time to sell your business.
- Business valuation. Evaluate the financial health and value of your business. Assess the profitability, growth potential, and market conditions. If you believe that selling your business can result in a significant return on investment or if you need the funds for other purposes, it may be worth considering selling. If not, you may want to continue growing your business until it is at a stage where a sale would offer a more valuable return on your investment. Evaluate the future growth potential of your business. Consider if there are significant growth opportunities that you can pursue or if the business has reached its peak. If you believe that the business has limited growth prospects relative to how much you’re willing to work on it, selling it to someone who can take it to the next level might be a wise decision.
- Effort to prepare your business to sell. Finally, consider how much effort will be required to get your business ready to sell. Are your business financials and taxes all in order and ready to present to potential buyers of your business? Either way, you would be well served to seek advice from professionals such as business brokers, financial advisors, and attorneys experienced in business sales. They can provide valuable insights, help you assess the market value of your business, and guide you through the process of preparing your business for sale.
2. Potential Buyers of Your Business
Finding a potential buyer for your business requires strategic planning and creative thinking. You’ll likely need to proactively target and reach out to individuals or entities who may be interested in acquiring your business. Finding potential buyers for your business requires persistence, research, and networking. Here are some considerations to help you in the process.
- The level of effort to find buyers. Based on market conditions and other goings on in your industry, are there buyers even available or will it be hard to find the right buyer? If there is a shortage of prospective buyers, it might not be the best time to sell your business. On the flip side, if there’s a lot of buyers for businesses like yours, it can make the sale process that much quicker and easier. Typically, there are four categories of business buyers: family, employees, partners, and investors. Competitors are also common buyers.
- How to find buyers. Finding ideal buyers for your business requires a proactive approach. Selling a business can be a complex process, and it’s advisable to seek the assistance of professionals, such as business brokers or M&A advisors, to guide you through the process. They can provide expertise, access to potential buyers, and support in negotiations to help you find the right buyer for your business. That said, you can always work on your own to find the right buyer if you’ve decided that now is the ideal time to sell your business. Look for competitors, complementary businesses, strategic investors, private equity firms, or individuals who have previously expressed interest in acquiring similar businesses. Research industry publications, news, and online databases to gather information on potential buyers. You might also consider advertising your business for sale in industry-specific publications or online channels that cater to potential buyers in your industry. This targeted approach can help attract interested parties actively seeking acquisition opportunities.
- Alignment on price. Aligning on sale price when selling a business can be a complex and negotiation-driven process. You want to at least be in the same ballpark as potential buyers in regards to price, otherwise it will be difficult to bridge that gap through negotiations.
- Start by obtaining a professional business valuation. Hire a certified appraiser or engage a business broker with expertise in valuing businesses. A proper valuation will provide an objective assessment of the business’s worth based on various factors such as financial performance, market conditions, growth potential, and industry comparables.
- Next, prepare detailed financial documentation to support the business’s value. This includes historical financial statements, tax returns, profit and loss statements, cash flow statements, income statements, and any other relevant financial records. Transparent and accurate financial information will build trust and facilitate price discussions.
- You should then conduct a comparative analysis of similar businesses that have recently been sold in your industry or market. This will give you insights into the price ranges and multiples used in recent transactions. Consider factors such as business size, growth prospects, market share, and industry trends to make meaningful comparisons.
- Develop a compelling case to justify your asking price. Highlight the business’s unique selling points, competitive advantages, growth prospects, and future potential. Present a comprehensive overview of the business’s financial performance and projections to support your pricing expectations.
- Engage professional advisors such as lawyers, accountants, or business brokers with expertise in mergers and acquisitions. They can provide valuable guidance, negotiate on your behalf, and help bridge price differences. Their experience and expertise can be instrumental in reaching a fair and favorable agreement.
- Recognize that price negotiations involve compromise. Consider non-price elements such as transition support, training, or ongoing consulting services to enhance the overall value proposition.
3. Legal Considerations
During the sales process, it’s essential to consider various legal aspects to protect your interests and ensure a smooth and legally compliant transaction. Here are some key legal considerations
- Alignment with other owners. If you have partners in your business, are they aligned on selling and agreeable with the split of the proceeds? When multiple company owners are involved in selling a business, it’s crucial to align their interests, goals, and expectations to ensure a smooth and successful transaction.
- Establish open and transparent communication among all owners. Regularly discuss the decision to sell, the reasons behind it, and the desired outcomes. Encourage all company owners to express their thoughts, concerns, and expectations regarding the sale process.
- Engage professional advisors, such as attorneys, accountants, or business brokers, who can provide impartial guidance and expertise. These advisors can help navigate complex issues, mediate discussions, and provide objective insights that facilitate alignment among all business partners.
- Discuss and agree upon the allocation of sale proceeds among the owners. Consider factors such as each owner’s ownership percentage, contributions to the business, financial needs, and future plans. Establish a fair and transparent method for distributing the proceeds that aligns with the owners’ expectations if this isn’t spelled out in a contract already.
- Establish a clear decision-making process for important aspects of the sale, such as evaluating offers, negotiating terms, and accepting or rejecting offers. Define roles and responsibilities, and consider appointing a representative or forming a committee to handle negotiations and communication with potential buyers.
- Recognize that achieving complete alignment among owners may require compromise and flexibility. Be open to exploring different options and finding creative solutions that meet the collective objectives and address individual concerns.
- Paying out shareholders. When a business is sold, shareholders typically receive their share of the proceeds based on their ownership percentage. The process of paying out shareholders involves several steps.
- First, you’ll need to calculate the ownership percentage of each shareholder based on the terms outlined in the company’s shareholder agreement or operating agreement. This percentage is typically determined by the number of shares held by each shareholder relative to the total outstanding shares.
- You then need to obtain a professional business valuation to determine the fair market value of the business. The valuation will help determine the overall sale proceeds. Once the business is sold, the shareholders’ payouts will be based on their ownership percentages.
- Allocate the sale proceeds to shareholders based on their ownership percentages. For example, if a shareholder owns 30% of the business, they would receive 30% of the total sale proceeds.
- Review any shareholder agreements, buy-sell agreements, or other contractual arrangements that may dictate how shareholders are paid out in the event of a sale. These agreements may contain specific provisions or mechanisms for distributing sale proceeds among the shareholders.
- Determine the method of payment for the shareholders. Payments can be made in cash, stock, or a combination of both, depending on the terms negotiated in the sale agreement. It is important to ensure that the payment method aligns with the shareholders’ preferences and any restrictions outlined in any shareholder agreements.
- Establish timelines and deadlines for the payout process to ensure timely distribution of funds to shareholders. Adhere to legal and regulatory requirements regarding the distribution of sale proceeds and any necessary filings or documentation.
4. Employee Considerations
When selling a business, it’s crucial for business owners to consider the impact on their employees and handle the transition in a fair and thoughtful manner. Here are some employee considerations to keep in mind for a successful sale.
- Absorbing employees as a condition of sale. Consider what will happen to your employees if you sell. Do you want a buyer to take them on or merge them into their business as a condition of sale? Retaining key employees during and after the sale can be critical to the success of the transition. Identify key employees whose knowledge, skills, and relationships are vital to the business’s ongoing operations. Consider offering retention bonuses or incentives to encourage them to stay through the transition period. If the buyer intends to retain employees, negotiate the transfer of employment contracts or draft new contracts with the buyer.
- Confidentiality. Emphasize the importance of maintaining confidentiality agreements regarding the sale until the appropriate time. Ensure that employees understand the need to keep sensitive information confidential to protect the business’s interests and maintain stability during the process.
- Employee assistance. Provide resources and support to employees who may be affected by the sale. Offer assistance in updating resumes, job search guidance, and networking opportunities. Consider partnering with outplacement services or providing career transition support to help employees navigate potential job changes.
- Compliance with employment laws. Ensure compliance with applicable employment laws and regulations during the sale process. Consult with legal counsel to understand any legal requirements, such as providing appropriate notice periods, severance pay, or fulfilling obligations under collective bargaining agreements, if applicable.
5. Financial Considerations
Each business sale is unique, and the financial considerations may vary depending on factors such as industry, size, profitability, and growth potential. Here are some key factors to consider during the sales process.
- Healthy balance sheet. Having liquid cash on your balance sheet can make you more appealing to buyers and puts you in a strong financial position for sale. A healthy balance sheet should showcase a substantial asset base. This includes tangible assets such as property, equipment, inventory, and cash, as well as intangible assets like intellectual property, patents, trademarks, and customer relationships. The quality and value of your assets can significantly impact the perceived value of your business. One way to improve your balance sheet is to use a tool such as invoice factoring to get outstanding invoices paid in days. Rather than having significant amounts of outstanding accounts receivable on your books, you can turn invoices into cash to help boost your balance sheet and make your business more appealing to prospective buyers. (See if you qualify to fund an invoice.)
- Clean set of books. Ensure that your financial statements, including income statements, balance sheets, and cash flow statements, are accurate, up to date, and presented in a clear and organized manner. Prospective buyers will perform due diligence and analyze your financial records to evaluate the financial health and performance of your business. You’ll not only want to ensure that your accounting is in order, but also your taxes when preparing for a future sale. You should anticipate and prepare for the financial due diligence process that buyers will conduct. Organizing and providing the necessary financial documentation, such as tax returns, financial statements, bank statements, contracts, and other supporting records ahead of time will allow you to be prepared to answer questions and address any concerns raised by the buyer’s financial experts.
How FundThrough Can Help If You're Selling Your Business
FundThrough can help ensure you have the extra cash you need on your books to make your business more appealing to potential buyers. Beyond that, we’re also experienced entrepreneurs, and have worked with clients as they navigated this exciting transition. If you’re client who is currently in the process of selling your business, or even just considering a sale, reach out to your dedicated account manager so we can figure out how best to support you with your goals.