Selling your business is one of the biggest decisions which you will take in your life. There are many reasons why an entrepreneur decides to sell their business and it’s always best to consider all options and possibilities before you make this decision. It’s best to prepare your Exit Strategy so that you can gain the best possible price for your business. After all, you have invested years building your business from scratch and you would want to maximize your outcome from your business.
There are numerous things to consider while planning your exit strategy for your business. First of all ask yourself the following 3 questions when thinking about selling your business:
- Why am I selling my business?
- When would be the best time to sell the business?
- How is Your Business Performing?
1. Why am I selling my business?
You might be wondering why this question is so important. There’s always a reason, why a business owner decides to sell their business. It can be good or bad, and the buyers will always ask this question. So, it will be in your best interest to prepare a truthful answer that doesn’t risk the success of your business sale.
Normally, people are not prepared for such a question and the wrong answer can scare away buyers. Some answers may be similar to “I was tired of my business and wanted a break.” This answer at the starter is a big ‘NO’. The moment you say this, almost 78% of buyers will lose interest in your business, and the rest will automatically start looking to reduce the amount paid for your business. The reason is that this indicates to them that your business may be unorganized and might be a high maintenance business to look after.
These are a great place to start for more information about “should you sell your Business”
If you have set your mind on selling your business, then it’s best to prepare for a proper answer for such a question, and this question is most common when you are meeting with a potential buyer. Every buyer will wonder, if you are describing your business to be as good as it is, why you would want out. Thinking that you are tired of your business and your company’s best days were in the past, then why would anyone else want to own it? You might be thinking that, no matter what you say in this situation, it will probably backfire.
Wondering how to come up with the right answer?
When coming up with the right answer, look at the following 4 key points below. If used properly, they will help you give a good answer to the question of why you are selling.
- Predicting a good future for your business
- How you have established a valuable business
- How you have reached a certain stage or a period in your life where you’d like to create some liquidity or a change in scenery for a new challenge.
- Also, willing to help stay to help the transition and hand over of the business.
There can be many ways to come up with a good answer to the ‘Why’ question, as it all depends on the type of business you are running and the Niche of your business. Although a good basic example of the ‘Why’ question would be something like
“Our team have built a substantial business in here, and we can see a brilliant future ahead. Nevertheless, I have reached a certain stage in my life where I have to create the liquidity of the business in which I have spent so many years, while at the same time finding a way to participate in some of the future upsides”
“We have built the business to a certain point and the staff has everything running well. I am looking for someone who would like to take it to its next stage while I look at a new challenge in my life. I am happy to stay for a couple of weeks or months to show you the ropes and help make the transition run smoothly between staff and clients if you like. ”
The above are just examples to show you how the above 4 key points can be used with a twist to gain the dominance which you desire. Also, there is no need to tell them about the stage of your life which requests you to take this action or why you want to sell the business, usually most of the potential buyers won’t ask this, they only want to make sure that you won’t become a competitor. After all, they were interested in your business and decided to invest their time in it. They must see some profit in it as well and with those 4 key points, you might be able to sell your business for some extra profits.
Have you thought about selling your business to one of your employees?
As the title states, instead of selling your business to a third party there is another option available, i.e. selling your business to your employees. Lately, this method is becoming quite popular not only in Australia but throughout the world. There are ups and downs to this option as well. Below you can find certain instances to understand this option better in order to utilize it to its full potential.
The Downside of selling your business to your employees
Considering you plan on selling your business within 12-18 months then this option is not for you. The reason is that this can give the wrong impression to staff and put undue pressure on them the look at buying the business or potentially losing their job.
This method is highly dependent on the relationship that you maintain with your employees. For instance, if you discuss this with your employees that you’re planning to sell your business within the next couple of months then it can cause them to feel offensive. Thinking they might lose their job or the owner is forcing them to purchase the business. There can be many cases when this proposal at this stage might not be that good of an option.
Also, employees tend to over exaggerate their personal contribution towards the company or the business and they also tend to overestimate their management skills. There can be many employees who can be quite skilled in their fields but the ability to do everything may not be available in all of them, for example negotiating a bank for a loan or inventing a new product or services, hiring and firing a staff etc. Also, if the employees offer isn’t acceptable by the owner then there’s also a chance of losing that person, either he or she will quit the job or they start working halfheartedly.
The Upside of Selling your business to your employee
If you are an entrepreneur who is planning an exit strategy in advance then this might become one of the best options available for you. Considering you want to sell your business in the next 5-10 years, then you can plan ahead and discuss the option of ownership of your company with a selected 1 or 2 employees whom you believe may be interested in buying the company, might be able to afford the business and have the potential to run the company by themselves.
The best practice to introduce them to this option is to ask them before you’re planning to sell your business. Saying, you might want to exit the business within the next 5-10 years and would they be interested in buying the company at that period of time. There are many advantages of this.
First, the employee doesn’t feel threatened as the business sale is something to work towards over a long period of time.
Second, if they are interested in purchasing the business then this can motivate them perform better and build a business which they will eventually own and run themselves in a few years.
If you are interested in Selling your business to your employees and want to know about the Major Tax benefits which you can get from Employee Stock Ownership Plan (ESOP) Please refer to the links below –
2. When Would Be The Best Time To Sell Your Business?
Usually, the best time to sell your business is when it’s performing well and there is a possible future for your business as well. No one wants to buy a sinking ship. But that’s not possible for every type of business, some business perform well, while others don’t perform as good.
Regardless of the state of the economy and your business industry, there are certain steps which you can take to increase the market value of your business.
The 7 key steps are listed below.
- Try to differentiate your business from the rest of your competitors, try to open a new path and don’t follow others. I.e. Work out why your clients use your business over other’s and use this to your advantage when talking to buyers.
- Trim the physical aspects of your business. I.e. Review your expenses, plans, contracts, etc There are always newer technologies and plans like telephones and internet which can help reduce your expenses.
- Try to improve the cash flow of your business, if you are not sure how then check the below steps which can help you gain an upper hand.
- Reduce any unnecessary inventory and storage costs in your business
- Make sure to re-negotiate your key supply contracts
- Try to ensure that the financial controls are established.
- Make sure to collect any pending receivables i.e. offer a discount for invoices paid before time or penalties for overdue invoices to help reduce outstanding invoices.
- Offer the options of paying on Credit Cards and renegotiate Credit Card fees with your bank.
- Create a clean and verified financial statement of your business for the last 3 years.
- Perform thorough maintenance of your business equipment to make sure that they are in good operating condition.
- Make sure to not rely on a limited number of customers for a huge amount of sales. i.e. if you lost 1 or 2 of these clients due to a competitor or liquidation, how would this effect your business?
- Look for other markets or referral sources which can complement your current client base. By exploring new market sectors and referral sources, this will help to grow your business and make it more financially stable. This can also potentially improve your business income during slow periods for your current market sectors.
- Work towards setting up and training a management team which can perform well when you are away or unavailable. This is considered a huge plus for potential investors and buyers. i.e. run by the scenario of what would happen to your business if you were hit by a bus tomorrow and couldn’t function for a while, what would happen to your business.
Also, during the sale of your business you have to go through the Australian gov taxation as well, you can find all you need to know regarding that in here -> Australian Gov Taxation
3. How is Your Business Performing?
There are usually 3 type of business performance Types:
- Declining performance or an Ailing business Industry
- Steady performance in a Sustainable Industry
- Growing Business in a Rising Industry
1. Declining performance or an Ailing business Industry
During this process you should also keep an eye on your cash flow, business profit and performance graphs. If it is declining then you have to work out a way to improve your business to create an upward shift.
For those who want to sell their business even if it’s declining, the options you have left is to price your business by the most recent year’s profits or lower. Which is probably a hard decision for the owners to execute given the time and effort someone invests in a business from its starting phase, owners do get emotionally attached to their businesses.
At this stage, putting your business for sale isn’t a very good option as it will be quite hard to find buyers for your business. Your business may be in a good location and still not perform well. The reason for this is usually because of either issues with staff, customer service, marketing, planning or management.
If you don’t know how to improve your business or don’t know why your business isn’t working, talk to an expert like a Business Coach or Consultant to see what you can do to help. This may shed some insight into your business from an external source which can turn your business around and remove the need from selling.
Although there are certain companies and people who like to buy this type of business, they are looking to purchase the business at rock bottom prices and grow it to make a good profit over a short period (usually 12-24 months). They usually purchase the business very cheap, and within 1-2 years they completely turn the business from a failing business to a profitable. They do this using their experience in marketing and business management.
2. Steady performance in a Sustainable Industry
As you can tell, these types of businesses have a much better chances of getting sold quickly than the previous ones. Usually, the business valuation is based upon the profits from last 3 to 5 yrs. Although it can vary on various factors but as the graph of such businesses maintains a basic performance, they cannot take the recent year’s profits as their best.
Another thing to keep in mind is that while keeping such businesses for sale, you cannot keep your mind at rest. It is possible that it may take some time till your business gets sold and during this timeline if your business improves more in profits then your chances for obtaining a higher price for your business increases as well.
The industry of such businesses matters as well. During the business sales process, if your profits drop then you will lose the primary impact of your business, there have been many cases where this type of businesses have not been sold. The reason being, some businesses take so much time to get sold that the owner start reducing their efforts and sometimes sell their business for much less than it’s actual worth.
3. Growing Business in a Rising Industry
As you might expect, this is one of those businesses that are always in demand and often get approached by business buyers even when the owner is not interested in selling the business. Sometimes this may be from your competitors as you are taking too much of their business and they want to stop this. It’s a common concept that those businesses which are showing good growth over the last couple of years will sell much quicker and for a high amount as well. But as mentioned before, when the business is usually performing so well, the owner is less likely to sell it. That’s not necessarily a bad thing at all. For instance, if everyone sold their business as soon as it shows great growth rate, no one would be able to make any money.
The point is, if a business is performing well and the owner is interested in selling their business, then it’s better to get the valuation done quickly than waiting till your business growth starts to decline. Usually, these types of businesses are sold for a higher price, and if the business can be managed without the owner, then the business is worth more and can be sold to both investors and business owners alike. This opens a whole new opportunity and quite a lot of buyers who are willing to pay more to purchase these types of businesses.
You can read more about the growth of industries in Australia at Rising Industries in Australia
Business Valuation and its Importance
Now that you have decided to proceed ahead with your business for sale, the next step is to get your business valued. Business Valuations can be quite tricky as there are numerous formulas for getting the business valued and
companies tend to use their own methods for working out the value of your business. But fear not, there are certain common methods used by business owners to know the estimate price of their business, as listed below.
1. Asset Valuation Method
As you can guess, an asset business valuation concentrates on a company’s net asset value or the market value of the company’s total assets minus its total liabilities. In common terms, an asset business valuation basically ask, how much investment it would take to recreate the same business from scratch. It also determines the worth of the business at the current market. But the asset based valuation doesn’t take the ability of those assets to generate income in future and the goodwill of the business. This is the reason why an asset based business valuation may indicate the true value of the business. But it is still a common practise to know the asset value of the business.
The way, asset valuations work is that it takes up all the asset values such as business stock, equipment, cash and other receivables. It also subtract the liabilities such as bank debt or due payments from the net value of the assets. The main drawback about the asset valuation is the goodwill of the business, as mentioned above. The goodwill of a business can be considered as quite crucial aspects depending on the industry in which your business stands. For example, a good reputation in a restaurant or of convenience store matters a lot, as it helps to generate current and future sales for that business.
There are also entrepreneurs who actually use asset based business valuations. Thinking that your business is not performing well and it doesn’t have goodwill then going with asset valuation method is one of the best practices.
2. Capitalized Future Earning Valuation Method
As the name indicated, this method of business valuation concentrates on the future earnings that the business is capable of earning to its owners. This is the ideal valuation method for most private business which takes into account the Return on Investment and Adjusted profits. In order to understand this valuation method, it’s best to know how professional valuators calculate the Return on Investment (ROI) of the business, so that you can use it to your advantage.
The ROI is usually calculated by the internal and external risks involved with the business. The lower the risks involved in the business, the lower the ROI of the business and the greater the value of the business increases. When considering the investors point of view, businesses are generally considered more risky than property investments, Govt. bonds etc.
The Lowest ROI reachable is close to 20%, beyond that the ROI between 20% to 100% is calculated on the basis of several risk factors involved in the business. Usually, the formula used to calculate the capitalized future earning of the business is Adjusted profits/ROI (%) = Business value. For example, if Alan owns a departmental store which makes an adjusted profit of $323,000 in 3 years’ time and the ROI of the business is 23.86% then the business value will be $1,353,730. It is easy to calculate the adjusted profits in a business but to find out the ROI, it requires a lot of professional experience.
Getting your business valued can be hard and quite tricky sometimes depending on the industry of your business. But once you have a clear picture of the different valuation methods, you can actually use the system to your own benefits to gain a good price for your business during the sales process.
The exit strategy of a business is not something which you can start the moment you decide to sell your business. Experienced entrepreneurs tend to plan an exit strategy even before they start a new business. If you are at the beginning stage, then it’s better to wait till you implement the methods above in order to gain a good price for your business. Although, planning an exit strategy is only a part of selling your business, without a good exit strategy you may not get the best price for your business or suffer losses while moving out from your business.
If you are interested in learning more about business Valuation, then you can find more details here -> Business Valuation by Australian Gov
There are numerous exit strategies depending on the type of business you are working in and your own personal goals. No matter which one you decide to choose, it’s best to start as soon as possible, planning an exit strategy is not something that you can do overnight and the more time you will have to plan the better chance of maximizing your profits when selling your business or listing your business for sale. So don’t wait and start planning your exit strategy now.
Article written with the help of Manish Khanna & businesses2sell.com.au Professional Staff