Most small business owners I know didn’t think much about selling their business during their startup years. They were too busy building empires, stretching for growth and launching new products and services. But at some point, succession planning needs to become a part of the conversation.
When it comes to determining the prime time to sell your business, planning is key. Getting the best price and terms for your business is not something that can typically be done last minute or on a whim. In fact, it usually takes years of positioning and coordination to be in the right place at the right time.
We’ve all heard stories like the Facebook acquisition of Instagram. In 2012, it made perfect sense for the 3-year-old photo sharing company with 13 employees to accept an offer of $1-billion in cash and stock options. But for the rest of us, with our small enterprises like restaurants, retail stores and auto repair shops, knowing the right time to sell can be significantly trickier.
As we consider the best time to sell, we might start with identifying the wrong time to sell a business. Typically, you want to avoid selling a business in duress or during a significant industry or cyclical downturn. If your business is shrinking, for example, and you consider it a temporary condition that you can survive and thrive beyond, holding out for better times is a wise choice. While some business acquirers are looking for ‘deals’ – which means buying businesses in a compromised position – most want to see going concerns with a decent track record for growth.
So if your best valuation comes from a position of growth and strength, how do you control and demonstrate it? The best place to start, not surprisingly, is with your financial statements. And while we all know there’s a lot more to your business, numbers don’t lie. A potential buyer will want to see strong sales and money left over.
Since, as a business owner, you also want your company to be profitable, you should take time to fine-tune your books.. It’s imperative that your books tell the story of a profitable growth company as opposed to a lifestyle company (i.e. one that serves your personal lifestyle and not much else).
Buyers want to see clear cost controls and margin improvement, as well as sales growth. There’s always room for improvement, so you’ll want to build a track record of leaving no stone unturned.
While your books are getting cleaned up, do the same with your operations. The best valuation comes to small businesses that are run like well-oiled machines. That means reducing the business’ dependence on you for every little detail and building your team to become self-sufficient. After all, a strong team is a big part of what will make your business so valuable.
A buyer is likely to pay a premium when the acquisition is turnkey. It’s a lot harder to find a buyer and command a good price when your business is chaotic, dependent on you for every little detail and a substantial ‘fixer upper.’ New owners want to take their skills and experience and build upon what you’ve already accomplished. They don’t want to spend time cleaning up your mess.
Once your books have at least a three-year track record, and your operations are streamlined and predictable, you’ll be in a great position to start seeking a buyer. Hopefully your industry and the economy overall will be strong and you can pitch the future of your business with confidence.
Remember, you’re not just selling your business. You are, essentially, selling money – future money. Your buyer is deciding to trade some of her money now for the opportunity to make even more money into the future.
There are risks for everyone. The future is unknown. While you may feel that your hard work has built a foundation that can grow forever, that is rarely the case. Take your time and seek outside advice as to the risks and rewards of selling now versus hanging on to build an even bigger business that be sold for even more. That sounds logical but it rarely happens in reality. Accepting a solid offer for your business today may prevent a situation of having no offer in the future if something out of your control takes place that compromises your business.
So when is the best time to start prepping your business for sale? Now. After all, selling doesn’t need to mean retirement. In my experience, most cashed-out small business owners take the money from the sale of their business and start another business. Then you get to have all that fun all over again!
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.