When, Why, And How To Sell Your Small Business?

When, Why, And How To Sell Your Small Business?

The economic situation is the main reason that causes significant mobility in business buying and selling. Then there are opportunities for business owners to consider selling their business at some point, and at the same time for investors and small business buyers.

In such a case the entrepreneurs who are thinking of selling their small business should consider a few things:

 

Sell ​​at the right time

Time is one of the most important variables to maximize the return on any investment. Transactions related to buying and selling real estate, buying and selling stocks and bonds, or commodities and foreign exchange, are examples that show very clearly to all of us that the time of the transaction can maximize the return on investment or the transaction or create an impression on someone. that a great opportunity was lost.

The same goes for selling a business. Economic conditions can often make it a conducive environment for most businesses to sell or at least consider selling.

While there is no way to know the perfect time to sell a business, there are some general indicators of when you should NOT:

  • Do not sell your business if you still love what you do:  If you still love your job and feel that you are fulfilling your professional and personal goals daily, there is no reason to leave your business.

In general, business owners should look to sell, especially when they want to make a change in their lifestyle or change their professional activity or retire.

  • Do not sell when the market is in recession:  The value of your business is related to the market in which it operates – so you should look to sell when the industry and the business itself are on the rise. You should not sell when the market is in decline – the downturn may be temporary. If there are signs of future growth, you will have to wait until the recovery comes.
  • Do not sell to the wrong person:  Not all buyers are the same. If you’re interested in your employees and the long-term success of your business after selling it, you need to do a thorough study of each potential buyer. Make sure of its reliability, find out about its liquidity and business plans, its environment, and its potential partners.
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When you decide to sell the business be prepared to answer difficult questions as you will be asked to explain the reason for the sale and support your decision

  • To your employees:  Before you sell your business, you need to create an exit strategy that includes, among other things, a careful approach with answers to possible questions from employees. While you should not discuss the sale with your employees until it is complete, you will need to have a plan for how the sale will be communicated when the time comes.
  • To potential buyers of your business:  During discussions and negotiations with buyers, you should expect a lot of difficult questions about your business. From macro questions about the market in which the company operates, the competition, and the culture of your business to questions about the operation of the company itself such as the amount of depreciation of assets, liquidity, receivables, and debts.
  • To yourself:  It is a great truth that many of the most difficult questions a business owner will have to answer are his own. Business owners, especially those who have owned the company for many years, often find it very difficult to adapt to the after-sales life. Be willing to answer honest questions about yourself and do not be afraid of introspection.

Find out what your business is worth

One of the biggest mistakes business owners make when selling their company is overestimating or underestimating their business. Value is dictated by what one is willing to pay for the company.

With this as a given, how can one determine the value of his business?

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The best way to determine the true value of your business is to hire an independent appraiser to evaluate the business. Valuation usually begins with the valuation of the company’s current and long-term assets, profitability statements and receivables from customers, short-term and long-term liabilities, equity, and other parameters that indicate the financial health of the company.

The appraiser will then look at market indicators to determine the long-term viability of the company and the industry in which it operates, as well as which similar companies have recently been sold. These various factors are weighted and combined to determine the current market value of your business.

Be able to support the value of your business

Determining the value of your business is important, but more so is your ability to defend your valuation when negotiating with a potential buyer. Note that maintaining transparent and sound financial statements improves the validity of your business valuation. Clear financial records are also the foundation of your defense against potential buyers who want to underestimate your business.

As with any trade-off, you need specific evidence to support your claims. Remember that potential buyers may have objections or questions about items such as market share, company reputation, and goodwill, but they may not disagree with your business financials especially if they are fully documented. It is important to have all the historical financial data of the company available.

Some of the financial statements commonly used to support a business valuation are:

  • Results for the Year:   The results for the year include gross sales, cost of goods sold, gross profit, operating expenses, and profits and losses of the company. Prospective buyers will use the results of the year to assess how profitable the business is and, in parallel with the use of a multiplier for the industry or trade in which the business is competing, to determine their valuation.
  • Cash Flow Statement: A cash flow statement gives you an idea of ​​how efficiently the business generates its most valuable asset – cash. Potential buyers will assess operating cash flows (inflows – outflows), potential investment disbursements as well as any short-term or medium-term financing. Cash flow analysis helps investors examine how the business manages its working capital, month by month.
  • Balance sheet:  The balance sheet shows potential buyers, at a given time e.g. At the end of the semester, an overview of the company’s assets, such as fixed assets (land, buildings, equipment), cash, stocks, and receivables from customers. It also shows, at the same time, the liabilities of the company, such as liabilities to suppliers, short-term and long-term loans, and equity.
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Based on the Balance Sheet and the Results of the Year, potential buyers can x-ray the company with various indicators such as the ratio of return on sales, the ratio of gross profit margin on sales, equity participation in total liabilities, etc.

  • Tax returns from the previous three to five years: Prospective buyers will want to see the latest tax returns to validate the numbers in your various financial analyzes and financial documents. In addition, they want to make sure that they are acquiring a business that is tax-aware.

 

Running a successful small business is demanding and at the same time an adventure that brings great satisfaction. Deciding to end this journey by selling the business can be a difficult choice. Selling a business is an exhausting and difficult process, but when, after many hours of difficult negotiations, the expected agreement is reached, the sellers will be richer – metaphorically and literally.

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