Is This The Year To Sell?
As we have seen the ebbs and flows of the economy over the past few years, many business owners are contemplating if this is the year to sell their company. Over this same time period, we have had a number of opportunities to speak with business owners, and we are often asked how the market is for business sales, and if it is a good time to sell.
While these seem like relatively simple questions, there are a myriad of factors that go into determining the best time to sell your business.
Is 2017 the Year?
In a recent survey of Business Brokers and M&A Professionals from across the United States, a majority of the respondents indicated that the pendulum is continuing to shift to a seller’s market across all deal sizes. While buyers still hold a slight advantage for deals valued at $1 million or less, the percentage is shrinking. One of the reasons for this shift towards a seller’s market is that we still have not seen the predicted wave of baby boomers selling their businesses. This has contributed to a shortage of quality and profitable businesses. When the prediction for the mass exodus of the baby boomers comes to fruition, we will likely see an oversupply of businesses for sale, and the pendulum swing back to a buyer’s market.
Are You Ready to Make the Leap?
Why do you want to sell? What will you do if you don’t sell? What will you do when you sell? These are some of the very first questions that we ask a business owner during our initial conversation/meeting. If they aren’t able to provide solid responses, they might not be ready, and experience has shown that they will more than likely have some regret later in the process if they decide to move ahead and sell. When you consider that businesses typically sell for somewhere in the ballpark of a multiple of 1.5x to 2.5x of discretionary earnings, a business owner could theoretically earn what someone is willing to pay them for their business within 1.5 to 2.5 years. For those owners who are not sure if the time is right to sell, this conversation during the valuation of their business is often enough to push them over the edge and help them decide that they are in fact not ready to sell.
Are Your Business Financials in Order and Showing a Profit?
If you decide that the time is right to sell, one of the next things to consider is the state of your business and the financials. Has your business shown consistent profits for at least the past two to three years? Depending on the size of the business you are selling, buyers at a minimum will want a solid return on their investment, and usually expect to draw a living wage from the business along with retiring the principle and interest on a loan if used in the purchase of the business.
One other area you should also consider deals with a common practice where business owners minimize their profitability for tax planning purposes by expensing things that we refer to as owner’s perks though the business. If this is something that you are doing, you may want to reconsider for a few years prior to putting your business up for sale. It is best to show the maximum profits for the business and to minimize the number add backs. At the end of the day, it is all about making an obvious case to prospective buyers that your business is worthy of receiving a top purchase price.
Is Your Business in Order?
In previous posts, we recommended that you should start positioning your business for sale the day you either started it, or bought it. With that in mind, you need to make sure that your business is ready to hand over to a new owner, and this takes time. Demonstrating to a prospective buyer that you have documented processes, detailed records on your equipment and inventory, etc., will help a buyer understand your business and make them feel more confident about their decision to pay a premium for your business.
If you think that 2017 might be the year to sell your business, we would appreciate the opportunity to help you determine if in fact the time is right. We can do this by helping you determine the value of your business, and identify areas that you may want to address in order to better position you and your business for a profitable and successful sale.