Do you dream of retiring or spending less time working in your business where you don’t have to deal with the day-to-day stresses of running your business? Well, this is not just a dream reserved for billion-dollar tech founders. Selling your business is a real option that is available to many small business owners. Even if you don’t plan to sell it, you can adopt the mindset as a way of focusing on maximising the value of your business. Why not start from the premise that you are building a business that could work without you?
Most small business owners have 3 questions when they think of selling their business – When should I sell? How much should I sell for? How can I prepare my company for sale?
- When should you sell your business?
This is both a personal and a business issue. On the personal front, think of the following questions:
• Do you want to spend more time on other important areas of your life such as family, friends or a hobby?
• Are you tired of running the business? Do you feel the day-to-day stresses are taking a toll on your health? Do you feel burnt out?
• Do you think it’s time for a change? Is there another passion project that excites you a lot more than your business?
A ‘yes’ to any of the above questions is a valid reason for selling your business. On the business front, think of the following questions:
• Can your business run independently without you? Have you set up systems and management teams to effectively run the business on its own?
• Do you feel that you cannot grow the business further? Are there people with capital or capabilities who can take your business to the next level?
• Will you get a good enough price (more in the next section) to give you financial security?
Again, a ‘yes’ to any of the above questions may indicate that the time is right for you to consider selling your business.
- How much should I sell my business for?
Things can get very technical here. Fortunately, there are a few simple methods you can apply to get a sense of what the right price might be.
Asset-based valuation: Add the value of all your assets, and subtract the liabilities. For e.g., if your business has machinery worth £1 million and a debt obligation of £100,000, then the value of your business is £900,000. Nice and simple! This method may not work as well for asset-light businesses (for e.g., service-based businesses like call centres).
Profit-multiple valuation: Take the average of profits your business has made in the last 2-3 years and multiply it by an appropriate multiple. For e.g., if your business has made £200,000 on average in the last 2 years and your chosen multiple is 3, you get a valuation of £600,000. Choosing a multiple depends on the growth of your business and the industry, with higher multiples appropriate for higher growth markets. For small businesses, multiples typically vary from 1 to 4.
Market-based valuation: Look for companies in your industry that have been sold within the last 6 months. You can find this information in your local newspaper or industry publications. Adjust their price based on the size of your own business. For example, a company similar to yours generates £200,000 in revenue and has been sold for £400,000. If your revenue is £100,000, then you should half your valuation to £200,000.
As mentioned above, valuing your company can get very technical. The above methods should give you a range of valuations to work with but I’m sure there are other approaches. However, it is advisable to get help from a business broker or accountant before you finalise any price. One example of a company that have helped ActionCoach clients in BCMS https://www.bcms.com/
- How can you prepare your company for sale?
This is where the rubber meets the road. It’s great to have dreams of selling your business and how much money you might make out of it. But before that is the hard work of actually making your business sale-ready. But below are the only 2 key strategies that you need to focus on. Implement these, and you’ll be on your island before you know it!
Make yourself redundant
What will be the one key difference when you sell your business to a potential buyer? The business won’t have you! That’s why it’s critical to start developing your business so that it can run without you:
• Hire a strong management team, train them and give them ownership. They should be able to take executive decisions exactly the way you would. They should be holding key relationships with customers and vendors. But training them is not enough. They should be incentivised to help the business succeed, even after you have left. This could mean offering them stock options or performance bonuses.
• Develop business systems and processes. If there is any repetitive task in your business (and there will be many!), write it down step-by-step to create a business process that anyone can follow easily. For example, do you look for certain key criteria when hiring people? Then create an internal document on how you do that so that others can follow. Or is there a standard on-boarding procedure for new clients? Then invest in a CRM software solution that can automate a bulk of the on-boarding tasks.
You need to be honest and tough on yourself by asking ‘What things would I keep, cut and change about my business’. I would expect you would do this on a regular basis anyway so use the thought of a possible sale to help you focus on how you can make the business the best you can make it right now.
A potential buyer will be looking at profitability, how sustainable that profit is, the scalability of the business to provide growth, the extent of systemization in the business and quality of the current team. It’s a worthwhile exercise to apply these to your business and if you need an objective view then talk to your Coach.
Clean up your financials
Potential buyers are interested in buying your business for one primary reason – they think they can make money. It’s your job to convince them that your business is profitable. Here’s how you do that:
• First, get your financial statements for the past 2 years audited by a professional. Prepare a report on the financials. It’s difficult to convince a buyer of your business’ profitability if they can’t make sense of the numbers.
• Second, focus on the profitability of your business in the short-term. Do not make any investments that are expected to make a return in the medium-term. Do not burden the business with non-critical personal/family expenses. You would rather keep your operations lean to increase the value of your business.
Of course, there are other reasons why a buyer will be interested in your business. It might be part of their acquisition strategy , offer complimentary services to existing clients or give them access to key people, intellectual property or industry specific accreditations. Make sure you understand the true value of all aspects of your business
This should answer all your key questions on selling your small business. If you are interested in selling your business, then start working on making yourself ‘redundant’ and cleaning up your finances. If you’re not interested in selling, then you should still keep your business valuation in mind. The motivation to sell a business is a very personal thing so given that you have invested so much time and effort to create it you will want to ensure the same level of attention to the sale.
I’m not covering the tactics of the sale or the transactional and negotiation issues in this article but you should start thinking about how you can optimise the business so that you are in the strongest possible position when the time comes.
If you want to learn more about what it takes to build a business that works without you then join me at my next workshop in January as we are focusing on ‘Team’. It’s part of our ongoing partnership with NatWest to encourage and educate business owners to get the most from owning and growing a business.
You can register at https://www.eventbrite.co.uk/e/building-a-strong-team-luton-tickets-37058683520 or simply get in touch at richardperry@actioncoach.com or 07913092897.
Join me on Facebook at https://www.facebook.com/actioncoachrichardperry/
Have a great week.
best regards
Richard
