The Right Time to Sell a Business
Are you considering selling your small- or medium-sized business? If so, timing plays a significant role in getting the best price and finding the best buyer that fits you and your company. It is almost impossible to have this information beforehand; however, you can look for a good time to sell by observing your company’s performance, industry conditions, and the current market.
Selling your business—a significant life event—comes with several benefits. You can finally pursue some personal goals and have the financial freedom to fund other retirement goals. However, you have to get this right the first time—no second chances once the deal is done—so it’s necessary to plan well and sell your business at the right time under the right conditions.
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When your business has experienced significant growth, that might be time to consider selling it. Running a business is risky, and the bigger your business, the higher the risks you face. The value of your business is not in your hands until you sell.
But first things first: the start is asking whether you’re ready to exit. Is your business ready to sell? Once you are prepared to sell and have an accurate understanding of your business’ value, it’s time to identify the best time to sell your business based on market trends and other factors.
Is the Business Sale-Ready?
Timing isn’t the only thing to consider. Other important factors include the motivation of potential buyers. Consider when a buyer thinks it is an excellent time to acquire a business. Try to see how your business looks from a buyer’s perspective. Think about motivation, company development, and external factors from their point of view. When everything looks good for a buyer, that’s a good time for you to initiate the sales process.
Make sure that you have all these three things in place:
- Business valuation
- An exit plan
- Clean, organized financials.
Justifying that your business is in the growth phase needs a lot of preparation. The better you prepare your business, the more evident that growth is and the better the value of your business will be.
However, calculating the value of your business is complex, time-consuming, and often results in a value significantly different from the price the buyer is willing to pay. Business owners often turn to mergers and acquisitions consulting firms or investment bankers who are experts in company valuation. A valuation performed by experts better justifies the price you want when negotiating with potential buyers.
When you establish an exit plan early, you prepare your business for the future. Not only this, but you will also be able to derive the highest value from your investment of time and money.
An exit plan gives you control over unforeseen future conditions. Even if it’s not your intention to sell your business anytime soon, an exit plan will help you know and understand the value of your business at any given point in time. If an offer to acquire your business is too good to pass, you will be able to make a more informed decision about your business.
Moreover, the most critical element for all industries and buyers interested in your business is growing. You must be able to provide evidence to a potential buyer to prove that your business is profitable. Such evidence allows you to defend the asking price. An exit plan helps you do this.
As a business owner, one mustn’t forget that strategic planning is crucial to know where you wish your business to go and what you want to achieve out of your business. An exit plan will help you choose and secure your business and showcase why investing or acquiring your business is worth the risk. An exit plan also identifies your future financial goals and your future financial needs. A carefully formulated exit plan, developed with the help of experts, will take care of all these aspects.
When you don’t have an exit plan, you end up exposing your business to severe financial losses due to volatile market conditions.
Clean, Organized Financials
If you consider selling your business anytime soon, you need to get serious about cleaning your business’s financial records.
So, what does “clean financial records” mean?
Most buyers will want to study the P&L records and balance sheet for three to five years. So, make sure that you record all the relevant business transactions in an organized chart of accounts. Form a habit of following accepted accounting methods and apply these practices consistently to your financial records. Failure to do this makes it difficult to compare your business with others in the industry.
Moreover, recorded transactions indicate what is happening in your business. Interested buyers will study financial statements to see how well the business is managed. Financial records also help buyers spot opportunities for improving operations if they take over business ownership.
Potential buyers may become interested in your business based on industry, products, services, or business model; however, they will never forgo the critical task of evaluating the financial details. As an alert business owner, consider your financial records as a window into the stability of your business. The presentation of organized, clean financials leaves a favorable impression of your business. Alternately, disorganized or hard-to-understand financials foment the buyer’s doubt as to the stability of your business and the veracity of the numbers, which in turn will affect its value.
Market Factors that Affect Selling
Certain market factors outside your control will affect the timing of your sale, but you can take steps to make your business as valuable as possible and make it the right time to sell. The factors can be good or bad for you. To get a better idea of the market forces that can impact you, ask yourself these two key questions:
- How many and which businesses in your industry (similar in size and activity) have been sold or acquired recently?
- Are there any similar businesses that have been bought out or acquired by larger ones?
Reviewing the history of business divestitures—similar to yours—over the past few years can help you get a feel for what your business will earn you. Use these trends to glean valuable information. For example, if you are running a startup, monitor the number of acquisitions in your industry to gauge whether now is the right time to sell your business.
Several market factors may indicate the right time to sell:
- Strong competition
- The upward trend of sale prices
- Low taxes
- Lowered interest rates
It may seem counterintuitive to sell when things are going pretty well, but that is precisely the right time to sell. Most buyers seek a growing business, which is why it is in your best interests to sell at this point in the life of your business.
According to Forbes, “According to the NFIB Small Business Optimism Index, the net percent of owners raising average selling prices increased 10 points to 36%. That’s the highest reading since April 1981 when it was 43%. In its quarterly report, BizBuySell said the median sales price was $350,000 in the first quarter, a 30% jump from a year ago.”
In a Nutshell
Assess the environment of the economy and trends. As an entrepreneur, you should also ask yourself whether you would buy your company. If the fundamentals and profits are positive, then your answer will be a “yes.” If so and if the following are true, then you can be sure that this is the right time to sell your business:
- Your business is ready to be sold.
- The business environment supports selling your business.
- You are prepared to sell your business.
Remember that most business owners don’t finalize the sale of their businesses on their own. Selling a business is a complicated process that benefits from an expert’s specialized skills and years of experience. Value Scout’s partner portal can help you find an expert advisor to help you decide when to exit and develop an exit strategy.