Most business owners will only sell a business once. It is critical for a business owner to understand the process to maximize their return, minimize taxes, and reduce the stress of the transaction. There are several myths that business owners must understand:
Myth #1: I can sell my business myself.
Some owners believe they can do a better job selling a business without the use of professional assistance. Others believe they can save money by selling a business themselves. Owners forget to factor in their ability to reach the largest audience, something that business brokers can do. Others forget that they need to have their sales and earnings stable or growing while they are trying to sell and thus something has to give if time is being spent on weeding out tire kickers. Business brokers also have the tools and experience to position the business in the best light and sell business potential. A business broker will recast the business financial statements to calculate seller’s discretionary earnings to show the true economic picture of the business. Since businesses are typically priced at a multiple of cash flow, for every dollar the business broker recovers that is legitimately buried in the financial statements, a business owner will receive a multiple of it in the selling price. Selling a business is not like selling any other product or service. If you're looking to sell on your own, confidentiality is lost. If word of a potential sale gets out, there are definite risks of losing existing and potential customers, employees, or suppliers with favorable credit terms.
Myth #2: I will sell my business when I am ready.
Certainly, an owner wants to be sure he or she is mentally and emotionally prepared to sell. But personal readiness is just one factor. Economic factors can have a significant impact on the sale of a business. Sale prices can be affected by industry consolidation, financial lending capabilities and interest rates, unemployment and many other economic measures. It is important to align your personal, business and financial goals when you plan to exit your business. Business brokers know what is happening in the market and ways to address the issues that currently exist.
Myth #3: I know what my business is worth.
Some owners will base the company value on what they need for retirement. Others will tell you they want $X because that is what they paid for the assets. And others will tell you that Business Owner XYZ at the golf club sold their business for a 6x multiple. Hmm...6x multiple of...Net Income? Seller's Discretionary Earnings? EBITDA? EBIT? Most business owners can't answer this question when asked. And of course others utilize industry multiples, but if they are not applying the multiple to the right base or logically work the numbers, the business will potentially be over or under priced.
A third party business valuation is a good idea for anyone seriously considering the sale of their business. An outside valuation will include a thorough analysis of the business and the market it operates in. This will provide a solid understanding of the company's growth potential, not some vague industry average or opinion of someone at the golf club. Business brokers will position to sell business growth opportunities, however the driving force is the past performance of the business.
Myth #4: Selling a business is like selling a house.
Preparing to sell your house may take a couple weeks. Then you talk to people to get the word out that the house is on the market. Once you get a satisfactory offer, you sign the paperwork (which is often boilerplate), turn over the keys and move on. If real estate agents are involved, you may never even meet the home buyer.
Selling a business is a much more complex process. A successful business sale usually requires a great deal of pre-planning. This may require that you operate your business for an additional one to three years drive sales, develop and cross train key employees, document your procedures and control expenses.
The average house will sell in less than four months, while the average business sale is six to eighteen months. Even after the business is sold, the seller can be expected to put in at least a several months, and possibly years of transition time, helping to make the new owner a success.
Understanding the realities of a business sale will prepare you for the process as well as help maximize your price and minimize your taxes. For most business owners, a significant amount of their net worth is in their business. Just like most individuals will go to a specialized doctor to address specific health issues to receive the best care, look at your business in the same light. Make sure you hire a certified business intermediary from the International Business Brokers Association to handle the sale of your business.
Exit on Your Terms
Business succession planning, or exit planning, is the process of developing a comprehensive road map that assists business owners in the successful and profitable exit a privately held business. This plan asks and answers all of the critical questions that an owner and his professional advisors must consider. Surprisingly, studies have shown that 75% of former business owners report that they regretted selling their business because it did not accomplish their personal or business objectives.
What is the reason for this high percentage
Most of these owners admit that they did not understand all of their options, were not able to make informed decisions, and did not know who to turn to for answers. Selling a business to a third party is just one of 8 options for a business owner. There are other options that may or may not be feasible for the business and the owner but they should be evaluated in the exit planning process.
Unfortunately, too many business owners do not have any idea how or when they will exit their business. As a result, most business owners are:
- reactive rather than proactive
- miss strategic opportunities
- undervalue their companies
- leave hard-earned wealth on the table
- pay too much in taxes when they sell their companies
A well-developed exit plan shows a business owner how to maximize the value of the business, minimize taxes, and ensure that he is able to accomplish all their personal and financial objectives in the process.
If retirement is a destination that you eventually want to reach, whether you are a sixty or thirty year old business owner, you should have a map to get you to your destination. An exit plan is that map and it allows you to hopefully reach the destination in the least amount of time avoiding detours in the process.
Strengths & Weaknesses of Your Company
Understand your strengths and weaknesses when selling a business is important to maximize business value. By knowing these traits, you can position your business and market to the prospective buyer audience that you are looking to attract. Strengths of an existing business over a start-up include buying a business that is up and running with an infrastructure in place. This includes existing customers, employees, suppliers, revenue and earnings. Financing the purchase of an existing business is typically easier than financing a start-up. Strengths that are unique to your business need to be relayed to prospective buyers.
Weaknesses, if presented right, could be opportunities in the eyes of a buyer. Being up front with the good and the bad will give you and the business more credibility. A buyer will identify most of everything in their due diligence. If you are not prepared, you may address things in the wrong way causing you to lose the potential buyer.