3 Things Every Business Owner Must Align Before Selling
Entrepreneurs often approach our team of brokers with a business to put to market that isn’t ready, perhaps more often than you would think. So, how do you know when your business is actually ready to sell?
Three things need to converge to make the business saleable — the business needs to be ready, the owner needs to be ready, and the sale has to make financial sense for the owner.
#1: The Business Has to Be Ready
It may be obvious, but first, you need to make sure that the business itself is ready to sell. You should be able to hand the proverbial keys to the kingdom over to the next owner without too much explanation. As such, the structure needs to be ready, and you need a business valuation, just to name a few things.
As an example, is your organization reliant on one customer? If you find yourself in a situation where 60% of your revenue comes from one client who you swear will “never leave,” your business isn’t ready to be sold. Even worse if you’re sure they’ll never leave because your brother-in-law is the head decision maker. What happens when he retires or leaves? What happens when you don’t own the company anymore? 60% of your revenue could leave with him.
The truth is, the market doesn’t care if your brother-in-law is in charge — the only thing it sees is your business that relies on just one client as its bread and butter.
In terms of restructuring, as another example, if you need to unwind your C-Corp structure before selling, make sure you do it three to five years before you end up selling. And if you have no idea how much your business is worth, you must work with a professional so that they can perform a valuation. You won’t be able to determine what it’s worth — and if it’s ready to sell — without one.
#2: The Business Owner Has to Be Ready
You as the owner also must be emotionally and psychologically prepared to sell your business. This is especially true for entrepreneurs who have worked in the same industry and potentially the same company for their entire lives.
Do you plan on retiring, or will you pursue another career? If you do want to retire, what will you do with your spare time? A few months of relaxing and watching TV are always nice, but it’s not sustainable. If you’re married, are you prepared to spend a lot more time with your spouse if they’re retired too? These are all very important questions that need answers before you can move forward.
#3: It Has to Make Financial Sense For the Owner
The third thing that needs to align before selling your business is that the deal has to make financial sense for you. You have to determine how much money you will take away from the sale — we call it your “walk away money.”
Again, do you plan to retire, or will you use the money to fund your next venture? You need to have financial peace of mind in either instance.
When determining whether a sale makes financial sense for you, you also must keep in mind the professional fees you’ll be expected to pay at the time of the sale. Accountants, attorneys, and brokers don’t work for free, after all. That’s not to mention taxes!
When you sell a business, you can’t simply tell your broker what you need, and they go out and sell it for that exact price. Your business will sell based on its fair market value. This is why it’s important to get number one sorted before you move on to numbers two and three — if your business is too reliant on one customer or has to pay a lot of taxes after the sale due to corporate structure, you won’t be able to walk away with as much as you hope (or need). And if you aren’t emotionally and mentally prepared to sell, you won’t get very far either.
The moral here is that selling a business takes a lot of forethought and planning, and the earlier you get started, the better. If any of the three aspects mentioned above become off balance, it can cause a deal to be unmarketable or totally fall apart.
Our advice? Talk to us early on so that we can help. When you know what you’re getting yourself into from the get-go, and exactly what you need to do on your end to get it done, everyone wins.
