As an entrepreneur, what is your long-term goal for your business? Do you have absolutely no idea, or are you a serial entrepreneur who begins an enterprise with the end in mind? There are many reasons you might have started or become the owner of a business, but whatever the reason perhaps you already know that you plan to eventually sell it. Or perhaps this is an option you are only just considering and want to explore. So, what should you do to prepare for an eventual successful exit? And how do you know when it is the right time to sell your business?
Businesses are most valuable when the owner is less essential to the daily operations of the company. This is a transition that some owners who love what they do can find difficult; however, if you are planning to sell, it is important to increase the value of your business and therefore such a transition may become necessary. What else should you consider?
A good time for business transition planning. The best time to prepare for a business transition is when you and the company are not under pressure or the eye of a potential buyer. You want to be able to do things at your own pace and you don’t want to be rushed or distracted. You need your house in order from a legal and business perspective, and you need to establish procedures and controls that will allow for business continuity when a new owner takes over. Risk mitigation is a critical factor in increasing the purchase price of your business, so you need contracts in place, especially for your largest customers (preferably with the right to assign) and key employees.
Having the right accounting firm. You need to look at your business value as regularly as you look at your monthly or quarterly numbers. You want your financial books and records in order because a buyer will want to know business fluctuations for the past three years to calculate projections for the next year or two.
Most of the time, a purchase price for your business is based upon a multiple of your adjusted earnings.
Having a good accounting firm goes a long way toward giving additional security to the buyer and confidence in past financial statements and practices.
A management team and key employees. As mentioned earlier, to support a successful transition, buyers will be looking to see whether your business has a management team and a core of key employees who run the day-to-day operations. Having a good team makes the business more valuable. Consider whether key employees could be enticed to stay with the company through some type of stock option or transaction bonus. Your mindset should be: If I’ve worked myself out of a job and am no longer essential in the day-to-day running of the company, then I’m doing a great job as an owner!
Your business house is in order – now what? If your business is in order and you are at peak valuation and you’re considering testing the waters for potential buyers, a good average range for M&A is 6 to 12 months, depending on variables such as time of the year, revenue, and earning trends. Currently, there is a relatively small pool of qualified sellers compared to the number of qualified and well-funded buyers, so now could be a very good time to explore your options for transition, or to at least make an informed decision about whether now is the right time to sell your business.
So when is a good time to sell? If in 5 years, you – as the owner – see yourself being out of the business, and there is no one internally to take over, then now is the time to start thinking about your exit plan. And the devil is in the details, so you shouldn’t wait until business is bad. If you plan ahead, you can potentially have more than one interested party and have leverage in negotiations for the best terms possible. In other words, the best time to think about your exit is when you don’t need to!
As in all matters related to the sale and/or acquisition of assets, businesses are recommended to consult with a knowledgeable valuation specialist.
This article was also featured in our newsletter Bottom Line Vol. 21
