Selling a business is no easy task and there are many factors to consider. Here we share our top tips on how to prepare your business to sell it for a maximum profit.
Timing is everything
It may seem obvious, but before selling your business, you need to be able to cite your reasons as this will be one of the very first questions that potential buyers will ask you. Maybe you are looking to retire or start a different stage of your life. Whatever the reason, you should ensure that you are selling your business both at the optimum time for you personally and at the best time for the company’s profitability.
If you know that you want to sell your business, you should try and forward plan as much as possible, ideally one to two years in advance. During this time, you can fine-tune your financial records, client base and business structure to maximise the profitability of your business. Not only this, but more thorough record-keeping will make the handover much easier and ensure smooth running of the business while it changes hands.
Most importantly, you want to sell your business at a time where things are growing and profitable. As markets fluctuate all the time, you will need to stay ahead of the curve as much as possible so that you are positioning your business as a sector leader at the point of sale. If you are selling your business at an inopportune moment, you could suffer a significant loss and decrease the overall value of the company.
Know how much your business is worth
Before selling your business, you should seek a professional valuation to determine the true value. Contracting a valuation firm to value your company will not only give you an accurate picture of how much the company is worth, it also boosts the credibility of the asking price and will seem more legitimate to potential buyers. Valuations will take all factors of the business into consideration including assets, debts, sales and inventory, providing you with a realistic estimate.
There is a difference between company revenues and cash flow and businesses will need to have an idea of both before approaching any potential buyers. You may also need to present how you foresee the company functioning in your absence and how that may impact prospects. Financial experts suggest that small businesses are typically worth two to five times their annual cash flow; this figure should also factor in any add-back expenses. As typical business owners have an average of 80% of their net worth attached to their business, selling the company at its optimum moment is crucial for their future livelihood.
Are your finances in order?
The purchase of a business is no small feat and, as such, buyers typically request many different types of information; the better organised your financials, the better position you will be in to negotiate with potential buyers.
“You should review your financial statements and tax returns for the last 3-5 years (depending on the age of your company),” explains Richard Dent of finance startup, Finger Finance.
“In addition to this, you should prepare a list of any inventories and equipment that you will be selling along with the business; this will include any intellectual property or non-physical assets.”
“Working with an accountant can make this process easier and make sure that nothing is left out. The more transparent you are with your buyers, the better the sale will be as the buyers know exactly what they are agreeing to.”
Boost your sales
Before taking to the market, you should ensure that your sales are as high as possible so that you can sell your business at a maximum profit. Buyers will typically want to look at sales and gross profit records in order to determine how viable a business is. If your company has multiple revenue streams and a healthy source of income, it will look better to potential buyers. If you can clearly demonstrate company growth, with potential for more in the coming years, this will be a compelling selling point for potential buyers. Other valuable factors include ongoing sales, a large and diverse client base, multiple income sources and a strong management team.
Find potential buyers
When entering a deal with potential buyers, it is as important for sellers to know who they are selling to as it is for buyers to know what they are buying. You should always pre-qualify potential buyers before engaging in any business transactions; this ensures that buyers are actually able to secure loans and pay for the purchase of the company.
Potential buyers could be:
- Competitors who are looking to grow their market share
- Foreign competitors looking to enter your market
- New entries into the market with funding in place
- Larger corporations who are looking to enter your market
- Existing employers who purchase the company through a management buy-out (MBO)
- Found through brokers and existing third party websites
When being approached by potential buyers, you should ask for proof of capital to ensure that they have the resources available to fund the purchase; for this, you can ask for financial statements and a down payment that is sufficient to cover the first six months of working capital.
Other factors that may be important when deciding between potential buyers are whether the buyers have any business experience. Although this is not necessarily a dealbreaker, it can be helpful if the buyer has a background in business or any industry-specific experience.
You should also make sure that you and the potential buyer are aligned in terms of timeframes; are they looking to purchase immediately or are they still some months from making an offer? All of this will help make sure that there are no surprises later and can save you a great deal of time and stress.
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