When is the Right Time to Sell My Business?
There are many factors that will motivate you to sell your business, and they will be unique to your situation. They can include divorce, ill health, a need to liquidate your assets, find a new strategic path, boredom or becoming distressed. Your sale price typically reflects past performance and profits, so consider this when you decide to put your business on the market. Here are some possible reasons you may want to sell your business:
Declining profits and performance
Running a business is tiring, and it is common for business owners to lose energy and motivation. You may notice that you are struggling to recover from a competitive threat. Decreased performance and declining profits is not unusual in this circumstance, but it does affect your sale price. If your business is at this stage, ask yourself if you can increase its profits and ensure a better sale price for the future. If you think you’ll struggle, it may be time to sell.
Sustained performance levels with slight profit variation
A business sale price can be based on the previous three to five years’ average profits, so if your business has performed consistently in this time, a potential buyer or investor can base their decision off these numbers. Remember that once your ‘for sale’ sign is up, you’ll need to maintain momentum and not fall into a false sense of security. The selling process takes a while, so you don’t want to lose your sale price advantage by taking your foot off the gas before completion.
Rising performance and climbing profits
Selling your business when it is booming seems like a counterintuitive decision. You’ve likely poured years of hard work and time into it, so why would you want to let that go? Investors are always looking for opportunities to take advantage of future market success, so an established, growing business always sells quickly for a better price. Rising profits and a period of growth will have a positive impact on the value of your business.
You don’t enjoy running your business anymore
When you started your business, challenging tasks likely motivated you. Now that you have run it for years, your passion and determination may not be what it once was. If you are finding your responsibilities tedious and unfulfilling, it may be time to prepare your exit.
Your business has outgrown your skills
Business ownership and leadership requires humility and acceptance. Perhaps you are finding it difficult to adapt to changing environments, or there may be someone who has new skills and concepts that will take your business to the next level. If you can no longer contribute to the development and success of your enterprise, selling it might be in the business’s best interest.
Threats on the horizon
Threats that impact your profits and performance are always looming. Perhaps you own a local video store, and you are struggling to keep up with global giants like Netflix. You may be a boutique hotel owner, and you are starting to lose your customer base to Airbnb.
A lucrative opportunity
A business exit strategy can also be motivated by opportunity. Perhaps you’re a fast, innovative, technology company that has attracted the attention of investors, and you have been offered a multimillion-dollar acquisition. This is a rare opportunity, and it may be worth considering.
Regardless of your reason for selling, creating an exit strategy is an intelligent way to run your business. Having a plan and detailed checklists in place will allow you to take advantage of any situation you see on the horizon, even if you don’t want to sell.
Selling a business is a demanding process, especially if you decide to do it on your own. Seeking professional assistance will alleviate some of this pressure, but there are always pros and cons for both avenues. We’ll go through some of these in the next section.
Should You Sell on Your Own or Use a Broker?
When it comes to selling a business, you’ll need to decide if you will do it yourself or appoint a business broker. If you choose to do it yourself, you run the risk of taking your eyes off running your business. This can lead to a decline in performance and profits. If you choose to appoint a broker, you’ll have to conduct ample research to ensure they take your business seriously. Ask your business networks and industry associations for recommendations. Here are some questions you could include in your research:
What’s the broker’s marketing strategy?
Ask for a detailed plan that a broker will action to advertise the business, solicit buyers, and achieve visibility. If their strategy is to write an online listing, then there is limited value and doing it yourself may be more beneficial. Request copies of profiles they have developed for other clients. Expect detailed pros and cons of the business profiled.
What have been their other sales successes and failures?
Ask the broker for the names of at least ten sellers with whom they have worked and contact them. If an owner gives you a positive review of a broker, regardless of if they’ve sold a business or not, it speaks volumes about the broker's ability, attitude, and ethics.
What do they ask in their first meeting with you?
Sometimes brokers will pressure you to sign up for a listing in your first meeting. This is not a good sign. A broker with multiple listings does not necessarily make them an outstanding business broker. They need to ask you a lot of questions about your business, and their beginning process should be to learn about your business so they can equip themselves to sell it successfully. If a broker asks you questions to get to know your business, it is a sign that they are willing to invest their time and energy. You should expect follow-up meetings, concise preparation, and honesty.
The value in an intermediary
Using a broker can make a deal flow better and ease communication, especially if you need to take a firm stance. They will be in your corner to deliver any bad news. However, too much intercession may work against you when negotiating a sale, so mix broker communication with personal communication.
To get a buyer comfortable enough to make an offer, they need all their questions answered and assurance that it will be an effective transition. The more confidence and trust you can instil in the buyer, the greater your chances of making the sale. It’s hard to build this credibility through a third-party broker alone, so make sure you involve yourself in important communications.
Other questions and points you can consider
- How much are you willing to pay for the services of a business broker?
- Will you feel a lack control over the process if you are used to doing everything yourself?
- A broker may pressure you to accept a contract you're not happy with
- Rather than risking the deal falling through, a broker may pressure you to accept a lower price so they can get their fee
- How many clients is the broker currently working with? Do they have time to represent you properly?
Deciding whether to use a business broker or sell your business on your own is a big decision. Both avenues have their pros and cons. The next step will be preparing your business for the selling journey.
How to Get Your Business in Top Shape to Sell
Preparing your business for sale can be a dauting and time-consuming task, so it is essential to have a checklist of everything you need to complete. We’ll discuss how to assess your business, document operations, consolidate your paperwork and make your premises presentable.
Assess your business
This is slightly different to valuing your business, and it requires analyzing how your business functions. Pretend that you are one of your customers. Use this perspective to analyze the internal operations of your business.
Ask yourself the following questions:
- What do you do well?
- What could you improve on?
- Who are your suppliers?
- How many products or services do you sell annually?
- Are there specific products and services that sell better than others, or with greater margins?
A great method for assessing your business is the SWOT analysis:
This method provides a reasonably well-rounded look at your business, as it considers its vulnerabilities and its potential.
2. Share your knowledge
As the business owner, ensure that your team knows how the business functions. Train your team throughout your business’s life, even more so when you prepare it for sale. This should include day-to-day, monthly, and annual operations that you handle. You probably do most of these things without thinking, but the buyer will want to know that once you’ve made your exit, your business will still function. Create an operations manual so you have a tangible document that your team and the potential buyer can refer to. You should also consider a succession plan so that no-one is left in the dark once you leave.
3. Organize your paperwork
As a business owner, you know how much paperwork is involved: meeting minutes, financial records, legal documents, and general filing. It can be overwhelming if you have not organized this documentation, so it is crucial to keep it in order. It is particularly important to have every financial statement and accounting record from at least three years. Having accessible, concise paperwork will prove that your business is lucrative and worth buying.
Always have selling on your mind, even if it’s not your plan. Stay organized so that if the time comes to sell, you have completed all your checklists.
4. Organise your employees
As part of the sale process, potential buyers are likely to request an overview of your current organisational structure and employees. To support this, you should prepare the following:
- An organisational chart
- A list of all positions
- Position descriptions for each role
- The total number of employees (a breakdown of full time, part time and casual)
- Your total annual wage cost for all employees
- Your total annual superannuation cost for all employees
- Any other incidental employment costs (like payroll taxes or workers compensation)
- Your percentage of labour cost to sales (this is referred to as labour productivity)
- Your leave balance sheet, showing the total leave accruals
- A list of any business-critical employees and the reason you classify them as such
- An overview of any employees with a current workers compensation claim
5. Tend to your business’s appearance
Take some extra time to look at the appearance of your business. Pay attention to peeling paint, a squeaky door, or a broken tap. Our first impressions are often based on what we see, so attending to areas that need improvement will always have a positive outcome.
At the end of the day, your prospective buyer will want to feel like they are making the right decision. Having well-documented financials, a succession plan, a looked-after premises, and a thorough assessment of your business will likely lead to a successful sale.
How to Value Your Business and Understand It's Worth
We will outline the principal motives for a business valuation, information you’ll need for an accurate valuation, scenarios for deploying various valuation methods, and the influence of intangible assets and goodwill.
Many business owners are under the impression that valuing a business is only important when it comes to selling it. While this is true, it is advantageous to have an idea of your business’s value throughout its journey. There are multiple reasons to value your business:
- You are expanding and buying another business
- You are divorcing or separating
- You are insuring the busines
- You are applying for a loan
- You are looking to attract investors
- You want to know your net worth
The valuation process can be complicated because you need a large amount of information. That is what preparation is of utmost importance. Here’s what you’ll need to value your business:
The history of your business
Regardless of if your business is a start-up or it has evolved into an established corporation, having a record of your business’s origins, goals, and journey up to now is crucial for understanding its value.
Having a thorough record of your employees helps potential buyers understand the job descriptions involved, including special skills, pay rates and staff morale. Be mindful of current employee’s leave entitlements and how this will be handled in the sale. If you have key employees that choose to leave with you, assess how that will affect the business.
Legal and commercial information
Information regarding your commercial contracts, lease arrangements, licenses, permits and registrations can impact the value of your business. You must provide proof that your business complies with all relevant environmental, health and safety laws, and disclose any current or pending legal proceedings.
Get advice about any location exclusion clauses that may affect the business.
Profit margins, annual turnovers, asset market values, and an assessment of tangible assets all come under the financial information grouping. All this can help valuers know a little more about the liabilities of your business and where its strongpoints lie.
Market information and industry conditions
Take an objective look at your industry. Think about its short and long-term outlooks, and if the industry is growing or shrinking. Consider your competitors and the competitive edge you have in the market. Assessing the market will make you aware of the prices other businesses in your sector are being advertised for.
Put simply, a business valuation is a process and set of procedures used to determine what a business is worth. Unfortunately, it is not that simple. Getting an accurate, concise valuation takes preparation, thought and support. For more information on how to value a business, you can read through our valuation guide. Here are some common methods you can use to value your business:
The value of a business can be calculated by considering the pricing guidelines of the industry it belongs to.
For example, a fast-food business can be historically valued based on 40% of annual revenue, while motels may be based on a set price of $20,000 per room. Each industry is different, so you’ll need to research its rules and formulas to arrive at a clear understanding of where your business lies within its system.
Comparable business-based evaluation
Look at businesses like yours. By reviewing comparable businesses, you can assess what yours is potentially worth. Of course, this method is not always accurate because every business is different. It has its unique customer base, locations, equipment, and tools.
Using this method in isolation will not give you an accurate value, but it will provide you with a ballpark figure if you want a starting point.
Basing your valuation on your assets can give you an overview of your business’s value.
You’ll need to consider both tangible and intangible assets and their depreciation rates. To use this method, add up the value of your assets and subtract any liabilities. Tangible assets can be tools, equipment, and property. There are parts of your business that you can’t quantify but that still play a significant role in the value of your business. These intangible sources, or goodwill, include:
- Customer loyalty
- Brand recognition
- Staff performance
- Customer lists
- Management stability
- Intellectual property ownership
- Business operation procedures
The figures in your accounts are a good starting point, but financial advisors are obliged to be prudent: they must use the minimum the assets could be sold for, so be realistic when you assess the value of your assets.
Asset liquidation-based valuation
This valuation method is based on how much money the business owner would receive if all tangible assets were sold immediately on the open market. This method is useful for business on the verge of failing, but it is less effective for businesses that want to continue operating, since it does not consider intangible assets.
Entry or start-up costs
This method involves gauging how much money it would take to build the business from scratch and reach its current size, status, and revenues. Consider the time and resources it takes to train staff, purchase premises and equipment, and establish branding and marketing.
This method should not be used on its own, as it does not consider intangible assets.
Discretionary income-based valuation
This method considers the current owner’s discretionary income, so that the future owner’s income can be estimated and the return on investment calculated. This only covers current income and cannot accurately encapsulate the future growth of the business.
Price/earnings ratio valuation
This is a common method. The market value per share is divided by post-tax earnings per share to deliver a P/E ratio. For example, if a business is trading at $33 per share and has earned $1.30 per share after tax, it will have a P/E ratio of 25.38.
Generally, the higher the ratio, the more investors expect the business to grow in the future.
Although a rough estimate of value can be obtained using this method, it is not always the best one for small businesses.
Discounted cash flow
Discounted cash flow (DCF) will help you estimate the value of an investment by calculating a business’s future cash flows. Simply put, DCF attempts to calculate the value of an investment today, by making assumptions of how much money it will accumulate in the future.
It’s appropriate for companies that have growth potential but lack hard assets and a financial track record. The most common example is a web-based start-up. The method deducts intangible criteria from projected cash flows or NPV (net present value).
Take the example of a company that makes a profit of $10k annually that will remain steady for the next ten years. $10k received in five years’ time is not worth the same as $10k received today. If the buyer received that $10k today, they could put it in a bank (assuming a 5% interest rate) and in five years’ time it would be worth $12,763. If you work backwards, the $10k received in five years' time is worth $7,835 today, based on the following discounted cash flow formula:
$10k received in 10 years' time is worth $6,139 today:
Adding all these figures together gives the buyer an idea of how much he or she should pay now to receive the returns from the business in the future. If the value arrived through DCF analysis is higher than the current investment cost, the opportunity may be a lucrative one. Unless you are familiar with DCF, we suggest seeking professional help if you choose this method.
Multiplier valuation by sales
Each industry has its own publications, business brokers and industry associations that can provide current multiples for your industry. The multiplier method uses the business’s gross sales multiplied by this multiple to reach a valuation.
For example, if gross sales are at $60,000 and the multiple is 0.4, the result will be a $24,000 business valuation. Remember that there are factors that can increase and decrease this multiple, so your valuation may not always be accurate.
Some factors that can increase a valuation multiple:
- Loyal customer base
- Stable earnings
- Your market industry
Some factors that can decrease a valuation multiple:
- Unstable earnings
- Reliance on owner
- Small product or services offering
Multiplier valuation by profits
This method gets its multiple from the profits of a business. Because of this, small businesses will slot into the lower range of multiples while established companies will fall into a higher range. While this method may seem clear-cut, it is not always accurate as it does not consider current financial status or potential threats.
Of course, buyers and sellers can have very different ideas of what a business is worth, especially when the seller has an emotional attachment to the business. To avoid this, we recommend seeking professional assistance.
Once you’re confident in the value of your business, it’s time to start thinking about how you’ll advertise it to attract buyers. Once you’ve found a buyer, we recommend you start preparing for due diligence: the buyer’s thorough examination of accounts, customer and supplier relationships and physical assets.
Helpful Advice on Negotiating the Sale of Your Business
In successful negotiations, both sides should win. The negotiating process should not feel confrontational. Standing up for yourself, arguing a suitable sale price and going through terms of conditions are often equated with conflict. However, this is an inevitable process of working toward a mutually beneficial gain.
Negotiating is a skill, so you’ll need to practice and grow.
Important negotiators are:
- Preparation and organization
- Clear communication
Plan, plan, plan
Planning will always be a crucial element in sales negotiations. Decide what you want your minimum, anticipated and ideal accepted outcome to be. We also recommend creating an ‘option B’ in your your negotiations fail. Clear planning comes from knowledge and insight, so research the buyer thoroughly and take time to meet them throughout the due diligence process. Have a clear understanding of their expectations and desires.
Present your plan calmly and concisely. Be clear about what you are offering and what you require from the other party. Look at the process comprehensively and be conscious of the expectations from both sides.
Strive for mutually beneficial solutions
Negotiating is also about compromise. By asking lots of questions and paying attention to all details, you can negotiate a sale that is mutually beneficial. The first offer is rarely accepted, so compromising and discussing concessions will be helpful.
It’s all about closing the deal
As you negotiate your sale, be aware of the signs that your deal is reaching its conclusion. Perhaps the other party’s counterarguments lack energy, or you may discover there is a convergence on the position you are both taking. This is a great time to introduce closing statements, put decisions in writing, and quickly follow up on commitments.
What if negotiations fail?
From your initial planning, you should have a minimum acceptable sale outcome. If that isn’t accepted, it’s wise to have a plan B and C. In the trade, this is known as your ‘best alternative to negotiated agreement’ or BATNA.
Use this backup plan to keep the negotiations going. Remember, the focus is on outcomes and not disagreements. There is also great power in walking away, or if you’ve reached the limit of your negotiating skills, you can invite a third-party mediator.
When you’ve agreed on initial terms, the only thing that stands between you and a successful sale is a smooth due diligence process.
The Due Diligence Process When Selling Your Business
Mutual trust established during negotiations can easily collapse if the buyer begins trawling your accounts, speaking to customers, or auditing employees. Here’s how to navigate due diligence safely.
A thorough buyer will conduct due diligence to confirm information presented in the initial sales pitch and identify any red flags. Being prepared for questions a buyer might have, and having all supporting documentation ready, will significantly aid the process. Here’s what you can expect during the due diligence process:
An investigation into business history and trends
The purchaser will want to look at sales targets, profit margins, overheads and working capital to see consistency in the numbers and possible areas of improvement. If there have been irregularities, a purchaser will ask for explanations.
Talking to customers
The best way for a buyer to rate products and services is to talk to current customers.
The buyer will assess your relationship with the customer, the impact a change in ownership may have, and gauge how much they need your help post-sale for a smooth transition.
Talking to suppliers
Like the customer conversation, due diligence will also uncover outstanding debts, how the suppliers perceive the business, how it compares to any supplier relationships with competitors, and if a change of ownership would impact supplier agreements.
Investigating and comparing financials
Due diligence allows a potential buyer to check if sales forecasts and projections are realistic. Balance sheets will be compared, and the buyer may request a comprehensive audit and assess whether any outstanding debts are manageable.
Talking to and auditing employees
A buyer will audit employees against any industry pay agreements. They will also check employee turnover against industry norms. Employees may be asked if they will stay or leave following a change of ownership. A buyer will also want to know which employees can help them most in initiating a seamless transition.
Under the Fair Work Act (2009) of Australia, there is a transfer of business if the following requirements are satisfied:
Transfer of employee entitlements
- a) the employment of an employee of the outgoing employer has terminated;
- b) within 3 months after the termination, the employee becomes employed by the new employer;
- c) the work the employee performs for the new employer is the same or substantially the same as the work the employee performed for the old employer
- d) there is a connection between the old employer and the new employer.
The new employer is required to recognise an employees' service with the old employer when calculating personal/carers leave, parental leave and the right to request flexible work arrangements.
If the new employer and the old employer are non-associated entities, the new employer has a choice whether to recognise an employee's prior service and their associated annual leave and redundancy pay. If the new employer does not agree to recognise service, the old employer must pay out these entitlements.
As such, during the due diligence process, it is likely the new employer will request information in relation to each employee's commencement date, current salary and leave balances. A provision in relation to how the above matters are dealt with is normally negotiated between both parties and added into the contract of sale.
How you can smooth the due diligence process
Due diligence pays off, with angel investors reporting that those who invested 20 hours or more in due diligence were five times more likely to get a return. So, it’s worth taking steps to pre-empt due diligence so you can achieve the best sale negotiation.
Create a digital folder containing documents related to your company and requests made in the due diligence process. You can then share this folder in response to a due diligence request.
In the form of documents organized into folders, this online repository of information allows you to define information flow in advance rather than prepare each piece on demand.
Possible requests from sellers as part of a due diligence checklist:
- Organizational charts
- Past financials and projections
- Management reports
- Stockholder communications
- Customer and supplier agreements
- Credit agreements and loan obligations
- Partnership or joint venture agreements
- Articles of incorporation
- Shareholder arrangements
- IP-related agreements
- Government authorizations
Other useful, customized documents you may wish to include:
- Customer acquisition channels
- Case studies of key customers
- A list of customers in your sales pipeline
- A spreadsheet with your company’s key metrics: your revenue, users, growth rates, customer acquisition cost, lifetime value.
- A financial plan for the next three years
Circumstances are different for every business for sale. There is a large amount of information that you need to consider, so seeking professional assistance to help you tackle some of the challenges will be advantageous. If you’ve carefully mapped out your road to selling, the process will be easier to handle. This is a big step with many considerations. If you still have questions or concerns, get in touch and we’ll support you.
Ready? Set. Sell!