Five questions to ask before selling your business
Whether you’ve always had an exit strategy in place or it’s something you have only just started thinking about, here are five essential questions to ask yourself before selling your business.
Is selling your business a good idea?
We’ve all had those days – whether it’s a change in personal circumstances or a run of less-than-ideal business dealings, there are times when selling your business seems like a great idea.
It’s really important not to let these external and possibly temporary influences make such an important decision for you. If presented with any of these common reasons why people consider selling, make sure you analyse the pros and cons.
Your personal circumstances have changed: Perhaps you’re nearing retirement, you’re relocating or your family situation has altered. Start researching your options if you don’t have an exit strategy already in place but don’t make any sudden moves.
Your business isn’t doing so well: It may be tempting to sell when your business isn’t living up to expectations, but you are not going to get the best price if it’s not in good shape. If you really want to sell, spend some time getting your business organised before you look for a buyer.
"Make sure that selling your business fits with your overall goals, personally as well as professionally. "
You’ve been approached by a potential buyer: Good for you! Make sure that selling your business fits with your overall goals, personally as well as professionally.
Is my house in order?
Clean and clear documentation gives the buyer confidence that they are purchasing a stable and robust business, which in turn means a better price.
Potential buyers will look at the following:
- Financial records – usually around three years’ worth of historical information.
- Financial forecasts/plans – a good business practice in any case but critical if you want to sell your business.
- Your corporate structure – is it set up in a way that is simple to transfer to another party? If not, make those changes now but bear in mind there may be business tax implications.
- Key contracts – both suppliers and customers.
Want more articles like this? Check out the business plans section.
Do I have the right professional support?
Legal and financial management advice are essential to protect you during and after the sale. Some points to consider are:
- Ensure potential buyers sign a non-disclosure agreement (NDA) before you give them access to your information.
- What are you selling? Selling shares vs. the business vs. specific assets all have different legal and tax implications.
- Limitations on liability after you have sold your business. Some buyers may insist on unlimited liability for aspects you disclose during the sale process. As a seller you want to limit this as much as possible.
- Ensure your books and records are up to date and complete.
- Seek advice on adjusting your records to strip out any unusual or non-recurring activity (aka normalising adjustments).
How much time am I willing to invest in selling my business?
Selling a business is a time-consuming process. You may need to take on additional support in administration, finance or sales so your business does not suffer. If you are not successful in selling you don’t want to return to a broken business.
How much is my business worth?
There are a number of ways to value a business, including:
- Discounted cash flow: This method starts with the financial projections of the business over a number of years and calculates how much those future cash flows are worth today. This works on the principle that $100 today is worth more than $100 in a year’s time.
- Revenue or profit multiples: Your current year revenue or profit is multiplied by a factor common to similar businesses in your industry.
- Cost to create: How much would it cost a potential buyer to build the business themselves? The theory is that they would pay this much plus a convenience premium to buy a ready-made business.
Essentially a business is only worth what a buyer is prepared to pay for it, but getting a clear idea up front of what is a reasonable value allows you to assess offers more confidently.
Have you considered selling your business? What other questions helped you decide it was the right or wrong time to sell?