Selling a business is a rather complicated process, so many will need help in this matter. For such purposes, these guidelines were created.
In this guide, you can find information about whether it is a good time to sell a business or not, if not, then when is it better to tackle this issue, how to get a business in shape before selling.
What is the most successful time to sell a business?
The idea of selling a business can arise for a number of reasons, some of which you can not control.
The reasons can be completely different, ranging from divorce, ending with a health condition or moving. Such ideas can arise from the desire to move alshe, boredom, or even depression.
Naturally, when the idea is fresh, the desire to do it is huge and the motivation is much greater than it will be later, but for such an operation it is necessary to choose the most profitable period of time, since this has a significant impact on the value of the business.
The selling price of a business directly depends on the profitability of this business in recent years, this is also the reason why it is worth waiting for the required period.
After declining income and business productivity
This is the most difficult period for any business owner, since such a blow can greatly affect motivation, just as it may simply not remain the strength and desire to resume the business.
This is a very common case in the sale of a business, but it is important to remember that the decrease in the revenue that the business brought before the sale has the greatest effect on the decrease in the selling price of the business.
If this situation has happened to you, you need to think about what, if possible, it would be better to keep the business and resume its profitability. Such a decision can not only push you to change your mind about selling the business, but also increase its price if it is sold in the future.
It is important to remember that there is a risk of worsening the situation, so you need to assess competitors in the market and the chances of business growth.
Ask yourself a question: can you do this? Can you rebuild your business?
With constant productivity levels with little fluctuations in profit
In such a situation, the sale price of a business may depend on the profitability of the business over the past few years, usually from 3 to 5, this will provide the buyer with confidence that he is buying a real business.
It is important to remember that you must not succumb to fake security. Once this sale subscription appears, it is important to maintain momentum.
The process of selling a business takes time, so you will have to wait for a certain period. However, the main thing to remember is the selling price advantage.
Increased revenue and increased business productivity
A business that is developing and growing noticeably always has a greater demand and price. A growing business shows buyers growth prospects in the market.
Few entrepreneurs are ready to sell their business during the growth period, as everyone loves to observe the result of their work.
However, this is the right time to wonder why you enjoy running this business.
How will you react to losses and a decrease in the company’s profitability? These are very important factors in selling a business, so you need to keep productivity and profitability in good shape.
There are also other reasons why you might consider selling your business.
You have realized that you do not enjoy running a business
The more a business develops, the more initially exciting and unusual problems become mundane and more administrative. If you get bored with running a business, this is a sign that it might be time to leave.
Business outgrew skills
Sometimes it happens that the owner is not able to develop the business further, he stopped at his maximum, but the business still has development prospects, in which case it is worth thinking about selling into new hands with fresh ideas.
Threats
You may notice that some problems are impending on your business, which can badly affect the business.
Financial opportunity
The idea of selling a business may come from an opportunity. You can develop your business and earn huge money, or you can doubt your capabilities and earn this money by selling the business to someone who can develop it.
It is never too early to create a plan to exit a business and sell it, as this moment may come, which should have a good strategy.
Will you contact a qualified specialist to help you in solving this issue?
Is it worth selling through a broker, or is it better to resolve this issue yourself?
There are pros and cons to using brokerage services. On the one hand, you get expert advice and help, but on the other hand, these are extra costs.
Choosing DIY means that you will need to distract yourself from running your business for a while.
If things are going badly with the sale of a business, then in addition to wasting time that you could devote to the business. You also lose opportunities that may have affected the profitability and performance of your business.
Business brokers, like any other professional, are different. Before choosing a broker, you need to study some questions regarding these people and their type of activity.
What Marketing Strategy Do Business Brokers Use?
It is necessary to ask the broker for a clear action plan that will help attract buyers and ensure the visibility of the business (advertising).
If a broker just gives you an idea for an online listing, then you can do it yourself, the added value is limited.
You also need to request copies of their past projects from brokers, ask them to indicate the pros and cons of the businesses with which they dealt.
More information on failures and successful sales
Ask for the names of at least 10 previous clients that the broker has worked with. After that, contact them and find out as much information as possible about this broker and the quality of its work.
If the reviews are positive, then this suggests that the broker is a capable and well-mannered person.
What questions should you be prepared for at the first meeting
The broker will usually put pressure on you psychologically to agree to sign the listing at the first meeting.
Do not trust this as large brokers will not make many announcements.
You need to trust the broker who is interested in your business and asks a lot of questions about it, because the broker’s duty is to know everything about the client’s product, so you can be well prepared for the sale of the business. Detailed questions and the appointment of the next meetings indicate the broker’s readiness for a good deal.
The broker should ask what the buyer will be interested in. He is also obliged to honestly assess the ability to sell your business.
The importance of a broker
Thanks to an intermediary, you can greatly facilitate your work and increase the number of potential deals. You will also be able to fully engage in business and not waste time thinking about selling, all the news can be reported to you by a broker.
Nevertheless, you should not give everything completely into the hands of a broker, you need to take part on your own so that it does not play against you later. The client wants to be confident in his purchase, so he will ask you questions, he will also hear the answers from you, not from the broker, so you should understand all the processes that are taking place.
What should be taken into account when deciding on a broker
- How much do you expect broker services to cost?
- Is it important for you to fully control the process, or are you ready to rely on the services of a broker?
- The broker may push you to accept a contract that you do not like.
- The broker can push you into a trade that will bring in less money than it could in order to get your interest without risk.
- Find out how many clients the broker is currently serving in order to understand if he can seriously deal with your issue.
- Learn about successful negotiation.
When you already know if you will be going to a business broker, it is worth preparing your business for sale.
How to make your business more popular among buyers
Preparation is a very important step in selling a business. It will talk about what honor is needed when preparing a business for sale and how to get more money from selling a business.
This is not an easy job, but there are some things to keep in mind to make the preparation stage easier.
- Assess the business
There is a difference between evaluating a business and evaluating it. It is necessary to study the business in detail in order to give a complete analysis of its work.
You need to consider your business from the point of view of the client. You also need to use your insider knowledge.
Ask yourself a few questions:
- What do you do best?
- What can be done better?
- Who are your suppliers?
- How much product or service is sold annually to your business?
- If there are services or goods that sell better than others, which ones?
You can also evaluate a business using the SWOT method. This is an analysis that focuses on:
- Strengths
- Weaknesses
- Opportunities
- Threats
Thanks to this method, you can consider the strengths and weaknesses of the business and evaluate it qualitatively.
You may have thought about analyzing your business for years, but it is better to write this method down, as it will be a real business analysis.
- Share operations
It is necessary that not only you are aware of how the business works, but also the team you are working with.
When you are managing operations, it is essential to empower your employees, since after you leave the business, someone will need to know about the company’s past and deal with similar matters.
ОA great option is an operation manual that will help you record everything that happens in the company.
It is also worth considering a succession plan.
- Collect documents
It is important to collect documents and keep them in order so that later there will be no problems.
It is important to keep all financial statements and accounting records (at least for the last year, ideally three or more).
The order in the documents will help you not only to prove the profitability of the business, but also to smooth the sale process.
The best preparation is discipline and willingness. You always need to think about the possibility of a sale and keep everything in order.
- Maintain good business appearance
After several years of work in business, you may notice that the premises do not look very good anymore.
You need to take the time and look at the type of business through the eyes of the buyer in order to correct the deficiencies.
At first glance, this is not a significant side of the business, but it can play a huge role in the client’s final decision.
You need to make the buyer feel comfortable so that he is confident in his choice.
Tidy and well-kept premises, financial performance, succession plan, all this plays a huge role in the sale of a business and can lead you to the desired result.
Understanding the value of the business
Here is information that will help you evaluate your business well.
Many entrepreneurs believe that they only need to evaluate a business when selling.
This is very important when selling, but it is better to have an understanding of the valuation even while doing business. There are a number of reasons why you should do this:
- Expanding a business, or buying a new business.
- Selling a business.
- Divorce.
- Business insurance.
- Applying for a loan.
- Attracting investors.
- Desire to know your capital.
A business valuation requires a lot of information, so make sure everything is prepared.
Essential Factors to Value Your Business
Business history
Information about the origin of the business, how it started and how it developed, is valuable, as it will continue to develop.
About employees
It is necessary to provide the buyer with information not only about yourself and the business, but also about the employees. Tell us about the qualifications of specialists, positions and types of activities of your employees.
It is important to remember about the rights of employees, the right to leave, so that employees are satisfied with the work with you and confirm the good reputation of the company.
Legal and commercial information
The value is also increased by the information provided to the client about such things as leases, commercial contracts, licenses, registrations, permits, as well as information that the business complies with all relevant environmental, health and safety laws. It is also necessary to ensure transparency of information on court cases.
Finance information
Help the buyer learn more about your business’s commitment and your strengths. It is necessary to provide information about the annual turnover of money, net profit, material and market assets.
Market information and industry conditions
Remember your competitors, think about your advantage over them. Also pay attention to the prospects for the industry (short and long term), and how the industry is shrinking.
This information also affects the value of the business.
Valuation models
Business valuation determines the value of a business when it is sold.
In order to evaluate the business correctly, you need to prepare and think about each step.
There are several methods of business valuation.
Business valuation by industry
The value of a business can be calculated from the pricing in the industry to which it belongs.
For example, fast food outlets can be valued based on 40% of annual income, while motels can be based on a set price of $ 20,000 per room.
You need to research your industry thoroughly to understand the intricacies of your business.
Business valuation of comparable companies
You need to evaluate companies that are similar to the business you are selling and compare them. This way you can understand the value of your business.
This is not the most accurate method because there are different influencing factors, but it can help you find an approximate figure to start with.
Asset-based valuation
This can provide an excellent indication of the estimated business value.
We must not forget about tangible and intangible assets, based on which it is worth evaluating a business.
First you need to add up the value of all assets and calculate. When calculating, care must be taken to use the minimum at which assets can be sold. It is important to be realistic in your assessment.
Tangible assets include equipment, property, etc., and intangible assets include the company’s reputation, brand, and intellectual property.
Evaluation based on liquidation
Using this method, you can calculate how much money the owner would have gained for the sale of all assets on the open market.
This method works well for companies that are at risk of shutting down permanently, but not very well for those planning to continue working. The sale includes only tangible assets.
Initial costs
By evaluating in this way, you can find out how much money is needed in order to build a business of this scale from scratch.
It is worth not forgetting about the time and finances that were spent on training employees, developing a brand, and more.
This calculation is also not accurate, because it only calculates tangible assets.
An estimate that is based on discretionary income
The current owner’s discretionary income is estimated to calculate the ROI using an estimate of the future owner’s income.
Shows only current income, does not take into account the prospects for business growth.
Evaluating the price-benefit ratio
This method divides the market value of a share by earnings per share after taxes. The P / E ratio is calculated, the higher it is, the more it attracts buyers, since then more successful business growth is predicted.
For example, with a price of $ 33 a share and an earnings of $ 1.30 a share after taxes, the P / E would be 25.38.
Discounted cash flow
This method uses the concept of “time value of money”. The cost of capital is used to get the present value.
If the value of this analysis turns out to be higher than the current investment value, then this provides an excellent selling opportunity.
For example, a company generates $ 10,000 a year and is forecast to remain stable for the next 10 years. If the buyer wants to receive a 10% yield, then this does not make sense.
Will an investor be able to get a higher profit thanks to bank investments for 5 years? What is the current value of profit earned in 5 years?
The $ 10,000 received five years later is worth $ 7,835 today, and if received in 10 years, the current cost is $ 6,139.
The main thing for the buyer is to calculate how much he should pay now in order to receive benefits in the future.
Multiplier score
There should be industry associations, brokers and publications in business that provide multipliers for your industry. The multiplier method uses the multiplication of gross sales by a multiplier.
This method may not always fully describe the situation.
Profit Multiplier Estimation
Larger companies fall into the high range of multiples and smaller companies into the lower range.
Although multiples are based on profit, they may not always be accurate, since they do not take into account the current financial position.
If you want to make sure that you are selling a business at the right price, you should seek the help of a specialist.
Business reputation, what does it mean?
This term includes parts of a business that cannot be valued in the open market, but play a significant role in the value of a business when sold. These include:
- Consumer commitment
- Popular brand name
- Staff productivity
- Customer base
- Stability of business management
- Intellectual property law
- Business reputation in the market
- Business Procedure
The buyer must understand the value of your business, since no one will pay money for an unknown reason.
Naturally, the seller and the buyer will have different views on the business valuation, since for the buyer it is just a product, and for the seller something more.
After you’ve evaluated your business, it’s time to get into advertising. Next, the field of attracting a buyer, you need to study his accounts and information about him as an entrepreneur.
5 Negotiation Skills That Will Help You
Gaining the customer’s trust is essential in negotiating.
The best you can provide for the client is to give him what he needs without losing anything.
During negotiations, you should avoid conflict, putting your own interests above the interests of the other side.
Fortunately, negotiation can be learned.
In order to successfully sell a business, you should not start with it right away, try to negotiate on a smaller scale in order to gradually come to the point of selling the business.
Key negotiator skills:
- Creative
- Flexible
- Knows how to assess the situation from both sides
- Knows how to plan well
- Fair
- Self-confident
- A good announcer and conversationalist
Planning is very important
Before negotiations, you need to plan them in order to be ready for a particular situation. It is necessary to consider several options for the development of events and always have a fallback.
The key to planning is knowledge that you can then use to consider possible situations. You need to know the client.
During negotiations, it is important to represent and understand what the client wants from you
You need to be transparent and understandable
Speak with your interlocutor calmly and as clearly as possible, do not force him to guess, give clear information about the business.
Assume what the other side of the transaction needs and write a comprehensive overview.
Need to find a compromise
It is necessary to constantly listen to the interlocutor and pay attention to all the details in order to take into account his desires and come to a mutually beneficial solution.
You need to negotiate compromises and wait until the other side is also willing to make concessions.
You may think you will refuse three times before how to agree
It’s about making a deal
It must be remembered that the deal comes to an end when you negotiate the sale of the business.
The party with which you are negotiating may not have enough strength, so you can observe body language, for example, your positions with the interlocutor coincided, or the interlocutor wearily bent over the table.
This is a great time to reach a final decision quickly.
What to do if the negotiation fails?
The initial plan should have a minimum acceptable sales result.
In the opposite case, you need to have backup options. This should be an equally good alternative solution to the problem.
In negotiations, the main thing is the result, so you should not pay much attention to disagreements. A backup plan is necessary in order to continue the conversation, which has reached a dead end, with this plan you need to brainstorm the interlocutor.
Also, leaving does not play a bad role, but, on the contrary, shows your skills. You can also invite an intermediary to the deal.
After the approval of the conditions specified in the transaction, only the due diligence process remains.
Due diligence when selling a business
Due diligence must be carried out carefully so that mutual trust does not collapse during customer checks.
A careful buyer will check all the information that the seller has provided him, in order to facilitate this process, it is necessary to provide documentation and prepare for the questions that the buyer may ask.
Put yourself in the client’s shoes and think about what questions you would ask?
What you need to be prepared for before due diligence:
The client will want to know about the history of the business, its trends
The buyer will be interested in viewing sales targets, profit margins, overheads and working capital to know the financial pros and cons of the company.
If the buyer finds any deviations from the norm, then you are obliged to provide him with an explanation.
Conversation with buyers
The best thing a buyer can do before buying a business is to talk to customers to learn about products and services. Find out how long they have been a customer, whether they use competition.
When communicating with customers, buyers evaluate how much they see the need for a smooth transition with your help.
Talking to suppliers
Due diligence includes checking for debt, supplier relationships, competitor comparisons and other internal business factors. The buyer also evaluates whether the change of ownership will affect the relationship with suppliers.
Study and comparison of monetary indicators
The buyer also checks the veracity of the company’s forecasts.
The buyer matches the words of the customers, suppliers and the seller to get a complete picture for a decision.
The buyer can also request a comprehensive audit.
The buyer checks the compliance of the employees and their pay agreement. It will also review employee turnover against industry regulations.
The buyer will also be interested in which employees will remain, which will leave and which of them can help them in promoting the business.
Simplifying the due diligence process
Business angels claim that those who spend more than 20 hours on due diligence get more success in promoting their business. Therefore, our task is to anticipate verification and achieve excellent results.
Digital Due Diligence Folder
Create a folder in the cloud storage where you will store all the documents and requests needed for due diligence, and then share the folder with the customer.
Such a solution will not only simplify and organize work, but will also help to look more solid in the eyes of the client.
What sellers ask for:
- Organisational 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
Preparing in advance will help you make the necessary edits and thoroughly check all the documents.
These documents are also important:
Customer acquisition channels
Case studies of key customers
A list of customers in your sales pipeline
A spreadsheet with your company’s key metrics
A financial plan for the next three years
It may sound very complicated, but the preparation process will make it easier to sell the business. With a successful due diligence, you have successfully sold the business.
