Exit on a High - The Khuram Dhanani Blog
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Khuram Dhanani

Exit on a High

When To Sell Your Business

When business is booming and you’re earning a high income, and enjoying your hard-earned success, it’s difficult to think about selling your business. The usual tendency is to want to keep harvesting the cash; thinking about selling your business is the last thing on your mind.

Except nothing lasts forever. 

Nothing.

Think about it. The vast majority of companies that composed the original S&P 500 are not there today. Industries change, consumer demand and interest wanes, new technologies emerge, competition increases, and companies die.

If the biggest companies in the world can become obsolete, what are the chances that your startup will still be pulling in some handsome revenue decades from now? The odds are not in your favor!

I agree it doesn’t make practical sense and may even seem counter-intuitive, but the best time to sell is when your business is riding high and the money is rolling in. This is the perfect time to sell your business. Now that it’s highly valued and you can get a great price, this is the time to secure your financial future. As you know, everything moves in cycles and if you wait, a turn of events could come crashing down on you and you’ll have missed your opportunity. Though you’re popular today, you may not be able to find a buyer then, and even if you do, the deal will probably be at a considerable discount. Don’t make this mistake. Sell when your business is strong, vibrant, and profitable. You’ll get your best price and, if you like being an entrepreneur, you can choose to start another business.

When business is good, that’s the best time to sell. A flourishing business will attract buyers who are willing to pay a premium for what you’ve built. Grab the chance while you can.

It’s important to know how businesses are sold. Let’s go over a few key details.

How Do Business Acquisitions Work?

When a business is sold, ownership is transferred from one individual or organization to another. This happens all the time. On a local level, restaurants are sometimes acquired by business people looking to increase their portfolio of profitable businesses. On a national level, multiple companies are often consolidated through industry-wide acquisitions.

The music industry provides a good example of consolidation. There were six major record labels from 1988 to 1999: Warner Music Group, EMI, Sony Music, BMG, Universal Music Group, and PolyGram. As a result of industry consolidation, now there are only three: Universal Music Group, Sony Music Entertainment, and Warner Music Group. 

Many industries go through radical transformations over time. The big players acquire the smaller ones, companies merge, entire industries go from mainstays of the economy to minor importance, and occasionally a business heavyweight goes bust. You may not remember when Pan Am dominated the airline industry or when Sears dominated retail. Times change – which is why it is wise to get out with your profits while you can!

If you’re in a relatively new industry and someone gives you an offer, it’s always a good idea to at least consider the proposition. Remember that if you’re getting offers, it’s likely that so are your competitors; if a big fish is gobbling up the competition, it may not be long before your business dries up as you lose the ability to be competitive.

If you do decide to sell your business, you will need the professional assistance of a lawyer, accountant, and commercial broker. it’s a fact that you don’t know what you don’t know, so consulting a specialist who can help you avoid pitfalls and also guide you with securing a decent sale is good business sense. Don’t think you can do this by yourself; you can’t. Selling a business is too complicated and there are a lot of options you may know nothing about.

Your ability to profit from the acquisition will depend on a number of factors including the reasons for the sale, the timing, and the market value of the business. Next, we go into some things you should consider to determine if you should sell your business and, if so, how to do it.

Here are seven considerations to think closely about.

1. Be Clear About Why You Are Selling the Business

If you’re actively looking to sell your business, your reason for selling is crucial in closing the deal with potential buyers. If your reason is that you can’t grow the business or achieve higher profitability, you’ll have a tough or impossible sell. Details can’t be hidden; your books will be inspected and buyers will know the true market value of your business.

Some entrepreneurs want to sell their business because they are bored, are ready to retire, or want to experience a different industry. These are all valid reasons to sell and are unlikely to cause concern with potential buyers.

If you’re trying to sell your business because of operational issues, attracting buyers will the very challenging. You would do well to fix your operations issues before looking for potential buyers; if you don’t, either you won’t sell your business quickly or you’ll have to sell your business at a steep discount. No one wants to buy a business that is in trouble unless they’re looking for a fixer-upper with significant potential.

2. Prepare the Business to Be Sold

Once you decide to sell, you should start preparing for the sale right away because time is a factor. Ideally, you should begin the process at least a year before you want to close a deal. This lead time will enable you to prepare financial records, fix any organizational issues, improve profitability, and complete other tasks that make the business a more attractive purchase for buyers. Investing your time to get these details in order can lead to a smoother acquisition; buyers won’t have serious objections when conducting their due diligence.

3. Determine Your Company’s Value

Before you approach potential buyers, you will need to determine what your business is worth so you can set a reasonable acquisition price. This process also manages your expectations.

When a business is brought to market for sale, there are legal determinations about the value of the business. You might think your business is worth a lot more than it is, or you might be surprised by how much more your business is worth than you originally thought. Most business owners overvalue their business because they base their estimates on factors that don’t apply in the market or in the courts. There are several different court-approved methods for valuing the worth of a business, and your valuation will fit one of the scenarios. If you’re not a licensed business appraiser, you’ll need to hire one.

The value of your business is determined by a process conducted by a business appraiser with expertise in your industry. The appraiser will help you prepare a detailed and legal explanation of what your company is worth. Preparing the documents provides the necessary credibility for your asking price.

4. Consider Using a Business Broker

A business broker is an individual or organization that assists with the sale of your business. Most brokers charge a commission, which is usually around 10% of the sale price. Without question, this is a good use of your money!

A good mergers and acquisitions broker will have a network of companies in your industry interested in acquiring more businesses. The business broker is an expert in the market, knows who to approach, and possesses the skills to negotiate in your favor. 

Unless you’re selling your company to someone you already know and trust, using a broker is the smartest decision. Selling businesses is their expertise. If you decide to sell your business by yourself, you could wind up in serious trouble. Selling a business is a complicated matter, even more, complicated than selling your home. 

Another advantage of using a broker is that your time is free to focus on keeping the business running smoothly and making adjustments so the sale is increasingly enticing. Since the broker is incentivized by the commission, they will want to maximize the selling price. They also keep the sale confidential, which is important in maintaining positive relations with customers, suppliers, and the general public. Rumors about a potential sale of your business will lower its value. Use a broker!  

5. Prepare the Proper Documents

When someone is seriously considering buying your company, they will request a detailed and comprehensive report about your organizational structure, the contracts you have in place, and the financial health of the business. Your broker will help you prepare this information so he or she can send it immediately upon the request of an interested and qualified buyer. 

This information will include your financial statements and tax returns for the last five years; they should be prepared by your accountant. You will also want to develop an inventory list of equipment that will be sold with the business. 

In addition, prepare a list of contacts to pass on to the new owner after the purchase is made. This includes contacts related to sales, supply purchases, applicable leases, partnerships, marketing contacts, and any other business or individual they may need to speak with after acquiring the company so the transition is smooth. Your information packet should also include a summary that describes how you conduct business so the new owner understands how business has been conducted and the structures that shape the productivity of the business.

6. Finding and Vetting Buyers

After completing the previous steps, selling your business will likely take some time, generally from six months to a year depending on how attractive your business is, and how active the market is.

If potential buyers are your close family, friends, or an employee of your company, the process may go faster. A situation like this tends to be more straightforward since you trust the individual, making the screening and assessment process faster. 

If you’re selling the business because you want to retire but still want your employees to be happy with where they work, you May want to make sure the company is being acquired by a buyer who values good staff and has a history of desirable working conditions. Be sure to discuss such expectations with your broker before they start approaching potential buyers. 

If you’re selling to move on and start a new business, you’ll want to make sure any non-compete agreements you sign won’t impede your new venture. You should absolutely use an attorney experienced in business law. Your broker can recommend a good business attorney if you don’t know one already.

  • Even if you think you’ve found the perfect buyer, don’t stop looking. The deal is not completed until the money is in your bank account. There’s no point losing time or opportunity by taking a chance that your perfect buyer will commit.
  • Maintain regular contact with all potential buyers.
  • Your broker will screen interested parties before giving them information about your business. Providing information to someone who isn’t serious about acquiring your business, or even someone who is not in a financial position to do so can be dangerous for your interests.
  • If you plan to finance the sale, work out the details with an accountant and a lawyer that specializes in business acquisitions so you can reach an agreement more easily and quickly.
  • While you should always allow for some room on the price for negotiation, it’s crucial that you and the buyer are both happy with the deal. Stand firm on a price that is reasonable.
  • Put all agreements in writing. Potential buyers should sign a nondisclosure and confidentiality agreement for your protection. The buyer may also ask you to sign a non-compete agreement to protect their interests. Your broker will arrange these details.

After the sale closes, there may be additional paperwork to complete. Complete it in a timely manner so the new owner can get started as quickly as possible.

7. Decide How to Use Your Sale Proceeds

Selling your business can feel like you’ve won the lottery. Be sure to have a celebration, but stay focused.

Hopefully, you’ve been consulting with a financial advisor, making decisions about what you’ll do with the money you’ll receive from the sale of your business. This is one of the smartest things you can do. Because you don’t know what you don’t know, preserving your wealth and using it in a way that provides financial security for yourself and your loved ones is essential.

In consultation with your financial advisor and your family, you may want to invest in a new business, retire, or build passive income streams through investments. Whatever you decide to do, don’t use your money in unreasonable ways. Money doesn’t always come in easily, but it sure flows out fast. Remember what it was like to start your first business and invest your money with the same values of growth and care. Now that you have a nice nest egg, you want to take advantage of your years of hard work and protect yourself by protecting your money, using it in ways that can build more wealth without unnecessary risk.

Lessons Learned

1. As a new entrepreneur, you have the luxury of choice with the way you wish to create your business; you can structure your business so the odds are in your favor.

2. Ideas are a dime a dozen, but execution is everything. Millions of great ideas fade away because they lack the foundation of execution.

3. Let others do the work you can’t do, and let them also do the work you don’t want to do. As much as possible, your job is thinking, not doing.

4. Never take risks that will put a torpedo under your water level. Analyze risks carefully so you can keep your ship afloat.

5. A successful entrepreneur sells what the market wants, not what he or she wishes the market wants.

6. When your business becomes a success, ride the bronco as long as you can, with every ounce of your strength. Great success is not normal in business, so plow and harvest as much as you can while you can.

7. You have a good mind so use it to create more value by leveraging everything that’s possible to leverage. An entrepreneur either finds or makes opportunities, and using leverage to increase your revenue or decrease your expenditures is good business.

8. Your real business as an entrepreneur is selling. Become a master at sales and your business will always thrive.

9. Know when to sell your business. If you hold on too long, circumstances may change and you’ll have missed the right moment to exit with your profits and the freedom to make more choices that can benefit your life.

Khuram Dhanani
Khuram Dhanani
Khuram Dhanani
kd@softstonecapital.com