“I have spent the last 25 years of my life pouring blood, sweat and tears into developing my business. I won’t sell it for a penny less than a million dollars”.
We have heard this refrain or a similar one many times from business vendors. There seems to be a belief that you will be rewarded for working hard. Unfortunately, this is not the way the market works.
Purchasers of businesses are only interested in one thing: results. The dollar amount you receive when you sell your business will be determined solely by the quality of operations you will be delivering to the purchaser.
So how do you maximize the amount of money you will receive when it’s time to exit your business and how do you maximize its value?
The right time to start planning for the sale of your business is when you launch it. You should always be developing what a purchaser will value.
Purchasers value extraordinary profits after paying a reasonable wage to the owner for managing the business. They like a strong and diverse customer base whose loyalties are to the business — not the owner. Purchasers want a well established management group that can function without day to day involvement of the owner, clearly documented systems for the entire team and a clearly defined and unique value proposition to your customers. Most importantly, the profits must be sustainable and grow into the future.
The size of the cheque you receive when you sell your business is normally a function and multiple of the amount of profits your business can earn and maintain. The size of the multiple will be determined by the factors listed above. The more of those you have, the less the perceived risk for the purchaser. As purchase risk declines, the multiple of earnings paid increases.
There are generally three types of buyers for your business. The first group is people who are close to you, such as family members, employees and managers of your business. The second group is made up of competitors, suppliers and customers who may have a special interest in your business as it could integrate profitably into their own. Finally, there may be financial buyers interested in your company’s cash flow either as a way for them to earn income or provide them a reasonable return on their investment. You’ll get the most money from competitors and employees, both of whom have a special vested interest in obtaining your customers and profitability.
If you’re getting ready to sell your business, ideally you need to start planning for the sale several years before you actually want to make it. In order to minimize the income taxes payable on that sale, you may need to reorganize your company and its assets.
You should also review your financial plan. Consider whether your expected proceeds from the sale will make enough money so that, along with other assets, you have sufficient capital to meet your financial objectives. In order to avoid last minute surprises, we recommend annual valuations of your business to ensure that its value is growing consistently with your plans.
Selling your business is complicated. You need a team to help you, including a merger and acquisition consultant, accountant, lawyer and income tax specialist.