What You Need To Know To Sell Your Business
Building your own business from the ground up is an exhilarating feeling. It’s your creation — your baby. Although you surely didn’t do absolutely everything yourself, it’s still yours and you can feel immensely proud.
For some of us, there eventually comes a point when we decide that it’s time to sell our business. It’s a bittersweet moment because our business is our baby. How can we just suddenly let go of all that hard work; all that blood, sweat and tears?
There are many reasons why someone might decide to sell their business. But what’s crucial at this point is that you do all the right things so that selling your business is as hassle-free as possible, and that you also get the right price for it.
Not sure what to do? In this article, we’ll be taking a look at exactly what you need to know to sell your business.
Understand Your “Why”
Why are you selling your business? It’s a big question, and it’s one that you need to answer before doing anything else.
There are multiple reasons an individual might decide now is the right time to sell their business. Maybe they want to retire, maybe they want to move onto a new venture. Maybe something has come up in their personal life that requires their attention or maybe they’re simply burnt out or bored.
Understanding your Why can encourage you to do the right things as you prepare for the sale. It will also help you with the next step …
Understand That Timing Is Everything
Let’s imagine that a business owner is burnt out and that this is the reason they’ve chosen to sell up. The problem is that selling a business while we’re burnt out is absolutely the wrong time to sell it.
Two reasons. First, selling your business during a period where you’re feeling drained means you’re selling it when you’re not yourself. In other words, what happens if after you’ve negotiated this particularly turbulent period of your business career, you decide that you want to keep your business? If you’re burnt out, it’s always a better idea to take a step back from operations for a while to allow your batteries to recharge.
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Second, selling your business when you’re low on energy and fed up with it means you won’t have the energy needed to get the best price.
The point here is that you need to understand that timing is everything when it comes to selling your business. There is a wrong time to sell and a right time. Another example of a wrong time to sell would be when we’re selling up just because we need instant cash. This usually means we sell for a price that’s way lower than it’s really worth. Worse still, we end up harboring regrets for years afterwards.
On the flip side, there are right times to sell:
- When you want to do something different with your life (perhaps you’ve decided that it’s time to retire)
- When your business is doing super well and therefore looks really appealing to potential buyers. Especially if you’ve got three years of profit behind you, this is always a good time to put it on the market
When the economy is thriving. A thriving economy will ensure you get a better price for your business, as well as more interested buyers
Other than that, it’s hard to find a “perfect time” to sell your business, and it’s pointless waiting around for that. Instead, take a look at your particular industry — how well your company is performing in either an over or underperforming industry. What are its highs and lows right now?
Understand The Whole Process
Selling a business is, of course, a whole process. It’s lengthy, it’s complex. There’s a lot to it. And it’s really important that you understand it all before you dive into things.
Understanding the process means you’ll have enough time to properly prepare. This includes valuing your business, drafting the offering, and actually selling it. The whole process can easily take over a year.
Make sure you do some separate research into the whole process. For now, here are some things to bear in mind:
- Closing documents and process
- Due diligence
- Letter of intent and term sheet
- Negotiation and deal structure
- Management meetings
- The offering memorandum
- Engaging buyers
- Valuation and maximizing value
Determine a Price
It’s not easy to work out how much a business is worth. There are economic ups and downs to take into consideration, as well as the various nuances of the market. Not to mention how receptive customers are to your product one week, and how much they ignore it the next.
It’s important to seek professional help from experts when it comes to pricing up your business. They can tell you what your business is worth, and they can also tell you how much cash you’ll need in order to do whatever you’ve got planned next (such as retiring, moving onto another venture, and so on).
For example, let’s say that you’ve been working hard at your business for the last ten years. You receive an offer of £6.5 million for it, and then another of £4 million.
How do you know which offer is best? It’s hard to say unless you fill in the information gap.
How you fill in this information gap depends on how you approach the valuation of your business. You could look at its tangible assets or its intangible elements (basically, its perceived value), or you could consider Earnings Multiples, which is the typical route many business owners go down. Earnings Multiples is when you value your company based on a multiple of net profits. Essentially it’s when you take the price/earnings ratio that represents the value of your business and divide it by its post-tax profits.
Hiring an accountant is the best way to determine your multiple. For more information on how to value your business, you can use this resource.
You can also work with a broker to help you determine the value of your business (more on this below).
… And Remember That Buyers Care More About Profits Than Revenue
A lot of first-time sellers wrongly assume that buyers are more drawn to the revenue figures than the profit.
Naturally, revenge figures can look good. But in reality, what buyers REALLY look for is profit.
Let’s consider for a moment that Business A has $40,000 in monthly revenue, along with $35,000 in monthly expenses. It’s making $5,000 profit each month and $70,000 profit annually.
Business B, on the other hand, has just $15,000 in monthly revenue, along with $1,000 in monthly expenses. It’s recording $10,000 each month in profit, as well as $110,000 annually.
So what’s better?
Experienced buyers will look at the profit numbers.
Forget The Past (Or, at least, don’t get caught up in it)
See, buyers aren’t really interested in what your business has done in the last few years. They’re much more interested in how it’s been performing over the course of the last 12 months, as well as its future sustainability.
If your business performed well in the past but has dipped recently and you’re still claiming that “it just needs a bit of fine-tuning to get it going again,” your words will probably fall on deaf ears.
A buyer doesn’t want to fix and recover your business, and they’re not that interested in its past. Naturally, if your business has grown steadily growing year-on-year you can definitely highlight that, particularly If you’ve been basing solid future plans on past performance.
Don’t Be a Jerk
I know what you’re thinking right now.
You’re probably staring at your laptop screen, protesting. “Hey! I’m not a jerk!”
I know you’re not a jerk. But regular, decent human beings can suddenly turn a little — shall we say, difficult — when it comes to selling their business.
Maybe it’s understandable. After all, they’ve spent so much of their life launching and running their business that they now want to do all they can to protect it during a sale. Moreover, while they’ve put their business up for sale, that’s not to say they’re not having some second thoughts.
And, hey, maybe they’re on the defensive because they want to make absolutely sure that whoever takes over their “baby” is going to care for it the way they did.
The thing is, however, that buyers don’t like dealing with jerky sellers. It puts them off. Being a jerk during the sales process can either cause you to get a much lower price for your business than you planned, or it could even prevent a sale altogether.
Being likeable, on the other hand, will encourage and invite more buyers to work with you. It could also tip the scales in your favour when it comes to the price.
You know that decent, kind, awesome human being you’ve been up until this point? Keep being that person during the whole sales process. It will get you further, it will speed things up, and it should ensure that you attract more interested buyers.
You Must Be a Good Seller
Surprisingly, not everyone who runs a business is a good seller, especially when it comes to selling their own business.
See, it’s really important to remember that a buyer is going to look at your company in terms of risk. You, on the other hand, might want to play down any risk. Bad move. If a buyer senses you’re keeping something to yourself, they will walk away.
So what does it mean to be a good seller?
First and foremost, it means being honest and transparent. The more honest you are, the more you’ll be able to minimise perceived risk in the mind of your buyer. Remember, if you keep things from them and they find out, their trust in you and your business will plummet. This can prevent a sale, or at least devalue your business. It’s the same if they ask you a question you were afraid they would ask, and you stall. It’s just not a good sign and alarm bells will ring in their head.
Being a good seller means knowing your business inside out, too. This doesn’t just mean knowing the products you sell, or your audience. It means knowing your financial details and your historical trends. It means having a deep knowledge about your SEO strategy and marketing efforts, as well as what works and what doesn’t work. The more intimate knowledge about your business you can share with a potential buyer, the better. As any buyer will admit, a knowledgeable seller is always more reassuring.
Lastly, being a good seller means that you’re prepared to do the hard work of selling. No one said selling a business is easy. You need to dedicate time and effort to it, and you also need to surround yourself with the right people.
You Need To Be a Good Negotiator
If you’re a first-time seller, you might think you’ll be able to negotiate the sale of your business because, hey, you’ve sold products and services before. But selling your business is an entirely unique thing.
Two reasons, mainly. First, selling something we’ve created, launched, nurtured, and grown ourselves from seed to tree is very emotional. Your business is literally like a child you’ve raised, and this alone makes selling it a high stake situation. Adding fuel to the fire is the fact that you obviously prize your asset highly and want to get the most value for it as possible. It’s not like selling another product.
Being a good negotiator, then, comes in very handy when it comes to selling your business. But what does being a good negotiator mean? What skills do you need? What should you be aware of? Here are some tips:
- Price isn’t everything — A lot of first-time sellers make the mistake of focussing too much on price. Yes, it’s important but it’s not the only thing that matters. You also need to focus on the terms, such as how the payout is structured, whether or not there’ll be an earn-out, and what will happen to your employees.
- Decide on a “walkaway number” — A walkaway number is a number that needs to be crossed in order for the deal to go through. You’ll need patience, preparation, and thorough research in order to get to this number, but sticking to it will mean you’re satisfied with the final deal
- Make concessions but be strategic with them — When you’re selling your business, you will have to make a few concessions. You might not want to make them, but you can soften the blow with some strategic thinking. For example, make it clear that you’re giving up something that has value. Then, suggest how the buyer can return the favor
- Know your buyer — What’s driving your buyer? What’s their true motivation? Are they negotiating for themselves or for a client? The more you know about your buyer, the more information you can use as leverage. It’s important that you understand what’s driving them, as this will boost your bargaining power
- Make the first offer — You don’t need to make the first offer, but this is a move that you should definitely consider. Why? Because it allows you to set an anchor in the discussions. However, I’d only suggest going down this route if you have an advantage over the buyer when it comes to information
- You can always walk away — I know some sellers don’t like to walk away from a deal, especially when it’s already gone so far. They feel as though all that time and effort they put into making it happen was for no reason, and they’d rather not be left with regret. However, having a walkway number in place (see above) can help you walk away with your head held high. Moreover, if you do walk away from a deal, make sure to spend a bit of time reflecting on the deal — what you could have done differently and better. This will help you strike a deal next time around
You Can Work With a Broker
Whilst you can sell your business yourself, you can also work with a broker who represents your business. Finding the right one is crucial, and it’s really important that you don’t just go along with the first one you come across. It can be tempting to do that because you just want to get the ball rolling. But choosing the wrong one right off the bat will cost you time and cash.
Therefore, it’s a good idea to interview a few brokers to see which one is the perfect fit for you, and who shares your vision.
How can you find a good broker? Here are some tips:
- Use referrals — If you know someone who runs their own business and who’s sold businesses in the past, ask them if they’ve used brokers. And if they have, are there any they would recommend? You could also ask any lawyers or accountants you know for recommendations, too
- Do your research — Researching the background of any potential broker is time-consuming. But it’s essential. Remember, this is your baby that’s at stake here. Take a closer look at any potential candidate and run the right background checks. The last thing you want is to hire a broker who’s got a lawsuit against them!
- Use a full-time broker — Using a full-time broker means you’re working with someone who’s dedicated to selling businesses. They will bring more experience and value to the table, as well as more contacts and a greater understanding of what it takes to not only value your business correctly, but also to help smooth over the sales process.
- Be wary of big upfront fees — It’s typical for a good, professional broker to ask for as much as 15% commission on the sale price of your business. But when a business broker requests a large upfront fee, you should take this as a warning sign that perhaps they’ve not got your best interests at heart
Be Prepared To Answer A Lot of Questions
Lastly, should you decide not to go with a broker, you need to expect to answer a LOT of questions. This is especially true if you’re selling to an experienced buyer who’s been around the block. They will likely pump you with questions, which is why it’s really important that you know your business inside out. One thing they’re looking for are red flags, or inconsistencies. If you make the mistake of not being able to give them a satisfying answer, they may pass.
It’s also important that you don’t judge a buyer based on the questions they’re asking. What might seem like a silly or pointless question to you could be important to the buyer, especially anyone who’s new to your industry. Don’t underestimate them — they may have huge pockets for investing, and they’re just looking to find out all they can about your business and industry.
If you do go with a broker, they will field most of the questions for you.
There’s no greater feeling than starting a business from scratch, launching it, nurturing it — and then selling it for a profit to someone who cares about it as much as you do.
Use the tips in this article to prepare for the sales process. As long as you’re prepared and do the right things, you can make a sale that’s swift, smooth, and as hassle-free as possible.
Why Should I Listen To You, Ben?
I built, scaled and sold an international 7-figure ecommerce business. Now I’m doing it again with several new brands. I consult with ecom businesses to help them get clear, take control and scale. And I co-founded Ecom Brokers — the brokerage by ecommerce people for ecommerce people.
Best known as the founder of Beast Gear, Ben Leonard is the classic millennial entrepreneur. He built a business on a laptop, in a cupboard, in his spare time. The difference? Ben grew an international 7-figure business and successfully exited after 3 years; the business holy grail.
Want to hear more from Ben? Check out his YouTube Channel for ecommerce knowledge bombs.
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