The economy is generally good. Does that mean I should sell my small business before we see the next downturn? The answer is “it all depends.” The economy does play a role, but so do many other factors.
Before you make that decision, closely consider these five questions:
- Do I really want to sell?
- Is my business in shape to sell?
- Does the current market favor my company?
- What do I need to make on the sale after taxes and expenses?
- What will I do after I sell?
Do I really want to sell?
The reason for selling your company can dictate how you approach your exit and identify the types of professionals with whom you want to work. If you are seeking to sell to get out from under debt, or if you simply do not see any other options – then you may want to first talk with a someone in the area of turn-around management. A turn-around specialist will give you a plan for moving your company (and yourself) to better footings, but may not be the person to market your company. To sell your business, you should consult a financial intermediary or business broker.
There are some very good financial intermediary and turn-around firms that work with small companies. To find them, ask for referrals from your trusted advisors and from individuals who have worked with such firms.
Is My Business in Sellable Shape?
No matter when you decide to sell your company – now or in the future – if it is not in good shape with respect to the factors below – it will not bring top dollar, and it might not even sell.
- Cash flow: Cash flow, not profitability, drives value. Accountant-defined profitability will not pay the bills – cash does. The higher and “cleaner” the cash generated from operations – the higher the value of the business.
- Revenue growth: Although quality cashflow is a key value driver for your business, all buyers want a company with a proven record of revenue growth. Sure, there may have been bumps along the way, but over the life of the business, the more consistent the growth, the more valuable your company.
- Concentrations: A concentration in customers or suppliers decreases the value of a company – even if the company is generating a healthy cash flow. The potential buyer looks at the concentration and its attendant risk on his investment and discounts the price accordingly. Sure, a replacement client or supplier may be found if one is lost, but that defection can change the dynamics of the cash flow the buyer is purchasing.
- Infrastructure: Infrastructure includes the depth of management; employee longevity; operational know-how; usable, accurate financial books and records; strong banking relationships; and, other indicators of quality management. These things comprise the core of the business without which you cannot produce revenue or generate cash flow. A good infrastructure can help overcome negative factors in other areas of a business. A poor infrastructure decreases value.
Does the current market favor my company?
- Industry segment: Industries go in and out of favor with buyers, which affects the market value of a company operating in a particular segment. For example, currently companies servicing the coal mining industry have come under pricing pressure when they are offered for sale due to the decline across the industry in general.
- Target buyers: You want to attract as many buyers as possible, so you need to understand the types of buyers in the market, what impacts their ability and desire to purchase, and their general criteria for acquisitions.
What do I need to make on the sale of my company?
Be realistic, work with a financial planner, accountant and/or tax specialist, and determine what you would take away from the sale of your business, given the potential selling price of your business. Then, decide if that is enough money for you to consider selling.
What will I do the day after the closing?
The process of selling a business is stressful – and you’ll want to specifically plan for dealing with the stress. Start thinking about what you would like to do before that day arrives. Will you need money to start a next career or will you take time off for golf and family? Just as you strategically planned for building your business, strategically consider the next phase of your life. Set goals based on what you and your loved ones what, and then move confidently move into the future.