Before You Sell Your Business

When determining the value or asking price of a small business, the cash flow number on which we base our multiple is SDE, Seller’s Discretionary Earnings.

One of the most important factors for a business owner to consider when selling their business is the reason for sale. In fact, it is the first thing the broker wants to know and it’s also one of the first things buyers are concerned about.

Your business broker primarily wants to know your reason for sale because, quite frankly, it is a good indicator of how motivated you are. Brokers are commission based for the most part and if a seller is just “testing the market,” it can eat up months of precious time and money and not result in a sale. The broker also wants to know why you are selling in order to gauge how quickly you need to sell and price the business accordingly. If you need to sell very quickly, for instance, the price will need to be lower in order to attract a buyer fast.

The buyer wants to know for different reasons. Most buyers are skeptical from the start about the businesses being offered and want to make sure that there are no “skeletons in the closet” that are forcing the sale. Their cautious approach is understandable given the fact that all businesses sound perfect in the advertisements! Yes, I am guilty of trying to put a positive spin on businesses myself but that is part of our job. While the buyers are often attracted to a business based on these glowing descriptions, they want proof pretty quickly or they are moving on. One of the first concerns they have is, “if this business is so great, why the heck are you selling??” If the reason is relocation for a spouse’s job or a health problem with the owner, they may feel comfortable. However, if the seller can’t give a good reason, the buyer will assume that they are trying to escape the business due to problems that may not be discovered until after the sale. The other primary reason that buyers want to know the reason for sale is to gauge your negotiating position. If that health problem is serious or that spouse starts their new job next month, they know that they have the upper hand and can probably get a better deal.

Now that we have a good idea of why it is so important, let’s look at some of the most common reasons for selling a business and the impact they have on negotiating position.

Financial Difficulties

• Could be personal financial problems or decline in the business
• Greatly reduces the value of the business
• Can make it difficult or impossible to sell
• This puts the seller in the worst negotiating position

Burnout

• Just tired of the daily grind or not having fun anymore
• The decline in interest makes bringing in new business difficult
• Negotiating position varies depending on the level of burnout

Health Problems, Relocation, or other Personal Reasons

• Weren’t planning to leave the business but need to for personal reasons
• Depending on immediacy, can force fast sale
• Poor negotiating position made worse if health issues are severe, relocation is soon, etc

Other Business Interests

• Moving on to another business venture, taking a job, seeking a “new challenge”
• Negotiating position depends on the circumstances

Planned Exit/Retirement

• Obviously this is the best reason to sell
• Maximizes business value in most cases
• By far the best negotiating position

There are obviously other reasons for selling a business and each situation is unique but these are the most common.  As you can see, many of the reasons are not necessarily planned and can have a negative impact on selling.  The good news for business owners is that if you plan ahead, you can make the process go much smoother and increase your chances of success regardless of what prompts you to sell.

Wow, pretty revolutionary statement, right?  Not at all.  Everyone knows that wanting to sell something is better than needing to. It all has to do with your negotiating position.  This is true whether you are talking about a business, a car, a house, or anything else for that matter.  The question then is why, when everyone knows this statement to be true, do so many business owners wait until they have to sell?

We’ve all heard that the best time to buy a new car is right when the next year’s model is coming out.  Why?  Because the dealers need to get the current models off the lot to make room for the new ones.  They NEED to sell these cars and as a result, they are willing to do so at a reduced price.  Is this a huge issue for the dealers?  No, becasuse their income is based on volume.  That one Camery that they parted with at a slight loss is merely an annoyance.  Now they have a lot full of the new models and, unless it’s a Hummer dealer, business continues as normal.

As a business owner, you are in a much different situation.  Chance are, the business represents your largest asset.  The importance of selling on “your terms” is amplified considerably.  Yes, if it’s a good business, it has provided you with a good income and allowed you to maintain your lifestyle, but this is it.  This is where you cash out, and the money you make on the sale has to continue providing that lifestyle going forward.

The solution is proactively planning and constantly evaluating your business and your circumstances.  Even if you don’t have a definitive time, whether year or age, that you want to exit, plan for it anyway.  Don’t let the ride home from the hospital after your first heart-attack (a downer I know, but a common situation), or the day you wake up and decide you want to head to the beach with your grandkids instead of the office, be the first time you think about selling.  Start planning NOW.  Keep an eye on your business’s value, your industry, the state of the lending markets, and the general economy.  Regualarly think to yourself, “is this the right time to sell?”  When the answer is “yes,” put your plan in motion.  You’ll be negotiating from a position of strength.  The result: more money and better terms for your business and, better yet, piece of mind.