7 Questions to Answer Before Selling Your Business
Every year, thousands of small and medium business owners shake hands as a sign of a successful business sale transaction. Some owners decide to retire, others need new capital to exploit market opportunities, while some companies fail and are liquidated.
The decision to sell a business can come from both negative and positive reasons. Sometimes the plans do not work and the business results do not live up to expectations. On the contrary, in the best of circumstances, potential buyers, attracted by the success of a business, can make unsolicited offers to buy that business. Any of these circumstances can dictate an entrepreneur's decision to sell the business.
Unfortunately, selling your business is not an (easy) choice for all entrepreneurs. The failure rate of small and medium enterprises is extraordinarily high, with almost half of the owners choosing to leave the businesses they set up before the fifth year of activity, according to Statistic Brain.
Despite the initial optimism, many owners regret that they have started their business and no longer hope to get the cheese, but just want to get out of the trap. In such cases, the main objective of the seller is to obtain a positive valuation, which will put the business in the best possible light, in order to reduce losses and restore the reputation of their company. However, if the likelihood of a liquidation arises on the horizon, competent legal and accounting advice is essential. Owners may also consider hiring the services of an experienced business broker to help present the company in the best possible light and favorably negotiate the terms of the sale.
On the contrary, if your business is a successful operation, you can find that potential buyers or their representatives regularly request the purchase of your company, maybe even advance preliminary (and very attractive) estimates of its market value. But before you take the decisive step and put your company on the market or engage in negotiations to sell your business, there are a number of questions you should answer.
1. What will you do after the sale?
Many small and medium business owners endure long days, week after week, year after year, building their business and navigating the dangerous twists and turns of the competitive market to create a tangible financial asset. In many cases, the company becomes an extension of the owner, consuming time, effort and passion. When the sale is completed, many former owners find themselves in a state of freedom they have not felt for years, wondering "Now what?".
Some, unable to find a new passion and materialization for their energy and talent, regret selling the business and quickly enter a second business, even without proper training. Others embrace their new freedom and engage in new careers and interests.
Take the time to consider how you will spend your days after selling the business. Do you foresee a future that you will enjoy? Sometimes staying put - even in the face of a profitable offer - is the best decision for your happiness.
2. Can you replace the income from your business?
Small and medium business owners get a number of financial benefits from their property. Many have a competitive salary, receive regular bonuses as profits grow, enjoy significant entertainment budgets and travels paid for by the company, uncontested reimbursement of expenses, maximum contributions to social security funds, and health benefits offered by the company. For example, an SME owner can earn an annual salary of 60,000 euros but can receive unaccounted benefits equivalent to his salary each year.
Before you decide to sell your business, make sure you understand all the financial benefits you receive every day, year after year, as an owner. After the sale, these benefits will most likely be eliminated, requiring either a change in your post-transaction lifestyle or additional income from private investments in order to maintain your lifestyle.
3. Does your business have a competitive advantage in the market?
What are the reasons why an objective and non-strategic buyer might be interested in your company? Do you have a unique product? Do you dominate your industry competitors in a certain geographic area? Are business revenues rising, falling, or stable?
The inability to define why a buyer should invest in your business will invariably lead to a lower selling price. If you don't know why someone should buy your company, you can't expect potential buyers to know and be available to pay for the hidden benefits!
4. Who are the potential buyers interested in your business?
Buyers interested in small and medium-sized businesses can arise from any medium; you can find them even among your employees, among local competitors, in the form of companies similar to your company, who want to develop strategically, to new markets, retirees who want to own a business and national brands looking to enter a certain geographical area or industry. Their motivation usually prescribes the level of investment they are willing to make, based on the strategic importance of the acquisition.
Remember that it is difficult to sell something if you cannot articulate the advantages that matter most to each buyer. Perform a simple exercise of imagination and put yourself in the place of the potential buyer, to see what those arguments are that could lead an investor to buy or fly.
5. What are the major barriers to a successful sale?
What are the obvious flaws of your company? Are sales declining or capped? If so, why? Are the products or services you offer no longer relevant to customers? What kind of prices do you offer, compared to the main competitors?
Here are some elements that can easily turn into obstacles and that require an in-depth analysis, to discover any weaknesses:
Insufficient or incorrect accounting records. The lack of complete and accurate financial records is a nonstarter for most business transfers. Financial records are the only image of the past that illustrates your company's financial progress - or lack thereof. Trying to sell your business without proper accounting records can mean that you will only receive a fraction of its real value - only that fraction that can be officially justified.
Unaccountable debts. Many small and medium-sized businesses have debts, usually personally secured by the main owner, as a result of ongoing business. Debts may include real estate mortgages on property, receivables, and inventory financing, as well as checks for equipment and automobiles, as well as non-specific loans. Many business owners use a single source of financing. It is not uncommon in such cases for debtors to be entitled to the withholding of all assets - including intangible assets such as trade names, patents, and customer lists. Therefore, debts must be settled before any change of ownership can be started.
Unfunded obligations. In addition to financial debt, many companies have pension or profit-sharing obligations, long-term contracts with customers or suppliers, obsolete equipment that needs reconditioning or replacement, or potential and ongoing legal proceedings. An unquantified obligation can significantly reduce the final selling price, or even lead to the abandonment of the investment by potential buyers.
Employment contracts. Are your employees covered by union contracts? Do key employees have employment contracts? Will the new owner be able to impose new working conditions or new salary levels and benefits?
Key employees. Do you have employees who are essential for business continuity? Do they have employment contracts and non-compete clauses, so that business continuity is respected? How difficult and expensive is it to replace these key employees?
6. Can you and the management team lead and participate in the business sale process?
The process of selling a business is neither easy nor fast. Business owners, key employees, and the company's consultants (especially the accountant and the lawyer) will have to attend countless meetings, phone calls, and take over tasks during the buyer's due diligence process. A business broker will be able to help you in this process, but part of the time will inevitably be invested by you and some of your employees - time that must be taken from the day-to-day running of the business.
While looking for the golden pot at the end of the rainbow, some business owners find that the diligence and sales processes are too long and expensive to continue. Set clear time limits that you and your employees can spend managing the selling process, away from day-to-day operations. Do not jeopardize the company's existence or performance due to the possibility of an attractive selling price or the presumption that a sale will be completed quickly.
7. How will your business be affected during the selling process?
Is it possible for employees to look for another job, given the uncertainty? Is it possible that some customers are looking for a new supplier? Maintaining confidentiality during the sale of a company is virtually impossible, especially during the process of the buyer's due diligence. It is important to control the message that reaches employees, from day one, to eliminate rumors and concerns from customers, employees, and partners, who usually assume that a sale will adversely affect them.
Also, don't forget to consider how stakeholders (individuals, groups, or organizations interested or concerned with your company's activities) will be affected by the sale. At the same time, avoid over-commitment to those who have concerns.
Once you have established that you are ready to sell your business, it is necessary to consider how such an approach generally proceeds. Understanding the stages of a typical business sale before starting the process is essential to avoid excessive costs and overly optimistic expectations.