It’s time to move on. Perhaps you’re retiring, or maybe you’ve got a new venture you’d like to develop. Either way, how can you make sure you find the right buyer and get the best price?
There are two aspects to getting the best value when selling your business. You need to show your business in the best possible light; and you need to attract a buyer who can offer the right deal.
Long before selling, you should be sprucing up your operation. A literal spring clean will make your assets shine, but a metaphorical cleanout is a good idea too. Sell any redundant assets so you can realise their value and make your business seem more streamlined. Get your records up to date, so you can show prospective buyers your situation at short notice. Make sure that key staff and client contracts are secured for the long term – these could be a major factor in your business’s value.
You should also think about the method you’ll use to evaluate your business. There are many options. Most small businesses are valued according to a multiple of their annual post-tax profit – but the multiples vary widely, depending on your sector. In most cases, the valuation is between five and ten times the annual profit, but ‘hot’ sectors (where the possibilities for growth are perceived to be greater) might use higher multiples.
Other valuation methods are based on the business’s assets; the price/earnings ratio; the equivalent cost for someone to build a similar business from scratch; or discounted cashflow, which emphasises the business’s long-term prospects. All of these methods are explained in detail over at the Knowledge Network.
There will be other factors that influence your valuation. For example, your departure from the business might significantly harm its value, so a handover period might be a good idea. In some industries, the number of customers or the rights to a certain property will have a large bearing on future profitability.
With the value established, you can think about potential buyers. For most small businesses, a stock market floatation isn’t a viable possibility. Many entrepreneurs favour a management buyout, where the transition can be smoothest for all concerned. But in the majority of cases, an external buyer is sought.
The next step is to identify potential buyers and send out a sales memorandum (via an agent, to preserve your anonymity) asking for offers. This short document outlines the business opportunity. The temptation is to portray the business as perfect, but be sure to indicate how it can be improved – that’s what will make it an attractive investment.
When offers come in, play bidders off against each other to force the price up before asking for final offers. Even when you’ve accepted one offer and drawn up Heads of Terms, keep an extra bidder interested, in case the deal falls through.
As with any sale, the key is to hold out for the best price you think you can get. If the offers aren’t good enough, and if you’re in no hurry to sell, consider waiting until market conditions change. You can only sell once.
Links
You might also like to read these related articles:
