But there’s a lot more to a company sale than walking away with top dollar. Selling your business involves identifying the right buyer, properly valuing your operations, and considering the potential emotional impacts.
Many entrepreneurs aren’t sure where to start, and they often don’t think about it until it’s too late, said Mark Johnston, a Dallas-based senior vice president and financial advisor with RBC Wealth Management.
“I have an 86-year-old client who still runs the day-to-day business,” he said. “His kids work with him, but not everyone is on the same page as to who will run the company. You don’t want to wait too long to figure out what to do with the business.”
In addition to consulting experts and performing due diligence, there are five critical things every entrepreneur should keep in mind before selling their business—even if it seems a long way off.
1. Value your business from the start
Many business owners wait until they actually decide to sell before putting a value on their company. But you may want to consider researching your potential sale price early—and update it often, said Dean Deutz, a vice president and private wealth consultant at RBC Wealth Management in Minneapolis.
Evaluating your business periodically can be especially helpful because it allows for a record of what the business was worth throughout its history, and allows you to track any areas that need to be improved.
“The metrics that go into the valuation process can help you make smart management decisions,” said Deutz. “If my goal is to sell the business for $10 million (£7.02 million) or $50 million (£35.1 million), then I know that I’ll need to increase earnings and/or reduce staffing costs. It helps drive or justify the business philosophy.”
There are four things you may want to look at when it comes time to valuing the business: book value, multiples of revenue, a multiple of net after tax earnings, and goodwill. There are several methods of valuation; some value their company on one of these four metrics, while others may come up with a price by taking an average of the four.
Consider consulting with business advisors to determine the best metric to value your business, but you should always have an idea of how much your business is worth right now—no matter how close you are to selling it.
2. Think about retirement when setting your price
Many factors will go into your asking price, but the first step is to figure out how much you’ll need in retirement.
“If I sell this company, am I going to be able to maximize what the company is worth for me, my kids, and my grandkids?” said Johnston. “Can I have the lifestyle that I want?”
Of course, how much you’ll need in retirement may not be what the business is actually worth, but the idea is to have a valuation goal you can work toward. Then you can move forward with building your company with that sale price in mind, and plan accordingly. If you’re not hitting your targets and goals, you’ll know that you need to take action to help you get there, said Johnston.
3. Understand the three types of buyers
Not all buyers are the same. Everyone has different priorities and you could get a different price based on who wants your business. Understanding these “three main types of buyers,” can be helpful to selling, said Johnston.
The first is the strategic buyer who wants to add a missing component to their already-existing company. “Say I’m a health care company and I operate in three segments,” Johnston said. “I need a fourth piece though and I’m coming to you to fill that need.” A strategic buyer may also be filling a geographic void. Someone could have operations in the Midwest, but wants to expand into the northern United States, he added.
The second type of buyer is private equity. Private equity activity has picked up thanks to low rates and there are “millions” of dollars flowing into this space right now, said Johnston. These firms often pay with cash, and they tend to pay well in today’s market. But most PE buyers want to see a business with a strong future. “They will go out and buy companies that have potential,” Johnston said. “They’ll want to grow it, fold it into another company, sell it, or IPO the business.”
The third kind of buyer is the high-net worth family who wants to buy a business to either add to their investment portfolio or to give their kids. They may want to draw a regular income from the business—so be prepared to show them what kind of yield they could earn—or they’ll simply buy it and put their children in charge.
When it’s time to sell your business, think about how it could appeal to each kind of buyer, and consider reaching out to potentially interested parties to explain how your company could be the right piece for their puzzle.
4. Prepare carefully if selling to family
A lot of entrepreneurs talk about selling their company in more general terms, but some of them may want to keep their business in the family. They should understand handing it over to children can be a far different process than a regular sale, said Deutz.
Some business owners may want to get the full value of the business and ask their children to pay what it’s actually worth. Other owners may gift the business to a child, and then fund their retirement by drawing an annual salary as a consultant.
There are many ways to transfer ownership, from putting it into a trust, to signing over only a certain percentage of your business, or dividing it among the children. Consider every way the business could change hands if you’re planning for a sale within your family. You should discuss transfer strategies with an advisor.
Perhaps most importantly, make sure your family members are actually interested in being the new owners of your business. Surprisingly, said Johnston, they don’t always want to be.
5. Keep your emotions out of it
Many business owners have put decades of hard work into building their company and naturally have emotional difficulties when letting go. But strong emotions can lead to irrational decisions, and an owner could price the business too high or turn down a good offer after finding fault with an interested seller.
“You have to keep an arms-length distance emotionally from what you think the buyer might be trying to do,” said Johnston. “Everyone is ultimately in it for themselves. No one’s buying a business for philanthropic reasons and you have to realize that.”
This is where advisors can come in handy. Johnston suggested engaging experts like a lawyer, a charted professional accountant, and an estate planner in the sale process. Not only do these people have experience selling companies, but they can help you make sound decisions while you’re navigating the emotional territory of selling your business.
“Remember [a business] is not a person,” Johnston said. “It’s a thing.” Being able to let go and separating your emotions may be the hardest thing about selling your business, but it shouldn’t stand in the way of smart preparation and thorough planning.”