When it comes to selling a business, when is the right time? It can be hard to take such a big, even life-changing decision.
Selling your company too soon may not give you enough time to prepare. You may not be able to do all the things that could help to get you a better valuation.
On the other hand, you could wait too long to put your company up for sale. This may lead to losing a buyer who was willing to pay the price you have in mind.
So, how can you get the timing right? Should you delay the sale until growth and profits pick up? Or is it better to start looking for a buyer right away and hope that you get the price you are looking for?
Remember that if you are contemplating a sale, two broad types of reasons will determine the timing — lifestyle and financial. Let’s analyze these in detail and see if you fall into one of several categories that we describe.
How Do You Know if It’s Time to Sell Your Business?
The rationale for selling a business would usually be prompted by financial reasons or by a proposed change in lifestyle.
Selling a Business: Financial Reasons
It’s taken years or even decades to build your business to its current size. Now you’re the owner of a flourishing enterprise that generates a sizeable profit. You’ve got an extensive client list that is expanding at a steady pace. Over the years, you’ve built a reputation for quality and fairness.
Why should you even think about selling at this stage?
Reason #1: The current market is favorable for selling a business
It could be the best time to sell. A survey conducted by CNBC/SurveyMonkey for the fourth quarter of 2019 found that business optimism has increased from the previous quarter. In Q3 2019, the Small Business Confidence Index stood at 57. In Q4, it jumped to 59.
What’s behind the optimism? Jon Cohen, chief research officer at SurveyMonkey, points out that “Small business owners are ending 2019 much the same way they ended 2018–satisfied with the current state of their business, anticipating revenue growth in the New Year, and working hard to attract new customers and hire qualified employees.”
If you are thinking about selling, this optimism is exactly what you need. It’s likely that the increased level of confidence will translate into a higher price.
Reason #2: Someone offers you a high price
A large company in the same line of business could be looking to expand in your area. They could offer you a price that is far more than the amount that you have in mind. It’s important to remember that a giant corporation won’t look at things in the same way as you do. Paying 30% or even 50% more than your company’s current valuation may make perfect sense to them.
Should you accept it or not? In most circumstances, your answer should be “yes.” You could probably put the extra money to good use. Save some for your retirement or buy a business with the cash that you receive.
Reason #3: A new opportunity presents itself
You may have a new business idea. It could be related to your current line of work. Or it could even be something that you haven’t done before. But you’re convinced that given the time and resources, you could make a success of it.
If you’re reasonably sure that you will succeed, it may make sense to raise the money you need by selling your existing business. Don’t forget that selling a business and using the funds to start a new venture carries some risk. However, your new project could be far more successful than your old company.
Selling a Business: Lifestyle Reasons
For many entrepreneurs, the timing for selling a business is determined by lifestyle reasons. These can fall into the following broad categories:
Reason #1: Retirement
Many entrepreneurs are reluctant to stop working. After all, that’s what they have been doing for most of their lives. Why should they stop now?
But age catches up with everyone. At 60 or 65, you won’t have the energy and enthusiasm that you had 30 years ago. At this stage, you’ll probably want to slow down. Data compiled by Manta, a small business directory provider, reveals that the retirement age for entrepreneurs can vary widely:
Manta data – at what age do small business owners retire?
|Retirement age||Percentage of business owners who plan to retire at this age|
|65 or older||42%|
That still leaves 10% of business owners (42% + 29% + 19% = 90%). When do they plan to retire? Manta’s data doesn’t say. Presumably, they haven’t decided on a retirement date.
Interestingly, according to the information that Manta has compiled, 18% of business owners say that they are planning to sell their businesses to fund their retirement.
Reason #2: Health
In some instances, an entrepreneur could be forced into retirement by illness. Or a family member may face a health issue. It could be necessary to sell the business to raise money for medical expenses.
You shouldn’t have to resort to selling a business to pay for unforeseen health-related costs. After all, you’ve toiled for years to build your company. It would be such a waste to have to sell it to pay for hospital bills.
Fortunately, there’s a solution. A good small business health care package can help. But be careful when you choose a health plan. There is a wide range of options, and you need to carry out your research carefully before making a choice.
Reason #3: A lack of passion
There’s a third “lifestyle” reason for selling a business. This doesn’t involve a health problem or advancing age. It has more to do with the level of involvement that an entrepreneur feels for the work. Carrying out the same activity year after year could become tiresome.
You may want to take it easy for some time or try something new. Selling your business could give you the money to do this.
Tips for Selling your Business
If you have decided to sell, the first step is to know how to value your business. View your company with the eyes of an outsider.
If you were the buyer, what would you look for? How would you arrive at an offer price? Which are the factors that would influence your decision to buy?
Now, use all this information to prepare yourself. Keep your financial statements ready and familiarize yourself with them. Spend some time with your accountant.
Here are some of the other things that you should do when you are preparing for selling a business:
- Get help: You’ll need an accountant and a lawyer to help you with the sale process. Additionally, taking a business broker’s assistance is usually a good idea. These professionals can help an individual selling a business get the highest possible price.
- Brush up on your negotiating skills: As a business owner, you’re used to negotiating with your suppliers and vendors. Now you should use this expertise with the prospective buyer
- Be prepared to stay on for some time: The buyer could ask you to continue at the company for a limited period. This will help the new owner during the transition.
Alternatives to Selling Your Business
Selling a business may not always be the most optimum option. If you are thinking about a sale because you want to retire, you could consider handing over operational responsibilities to a trusted relative. This will allow you to spend less time at work while retaining the business.
What if you want to sell because you need money? Instead of a sale, you could consider taking a small business loan. At Camino Financial, we offer borrowers amounts up to $400,000 repayable in periods ranging from 24 to 60 months.
You have a good chance of getting your loan approved. Out credit decisions are guided by the Camino Financial motto — “No business left behind.” Borrowers without a FICO score are eligible to apply. So are individuals without a credit history. You can find out if you’re eligible by filling out this simple form.
The Bottom Line
Selling a business may not always be the best option. But lifestyle or financial reasons could compel you to sell. If you have decided to go ahead with the sale, read our post on how to sell a business. It will help you learn the ins and outs of the selling process.