written by
Jeana Medlin
published Mar 10, 2024
You’ve been speaking to friends and family and have decided to start the new year by selling your business. Whether you’re making this life-changing decision as an exit strategy, for health reasons, or to branch into another venture, there are many key things you need to know about how to sell a business before you take this step.
Most importantly, the money you make off this sale is the reward you get for your years of building the business from the ground up. So, whatever happens, do not sell your business for cheap. Read on to learn how to get the best deal for your business sale!
How Do You Maximize the Value of a Business?
Since 2021, small businesses have sold for more money than they did during the pandemic. According to Forbes, these businesses have seen an increase of over 16% in their sales prices thanks to the growing demand for top-performing businesses and low interest rates.
For you, the big question is, “How do I sell my business for the best price?” Before answering this, let’s see how you can grow your business to the point where you can get top dollar.
Step 1: Be Proactive
The first thing you must do is be proactive. You need to figure out your company’s value long before the sale. By doing this on time, you can identify potential issues affecting its value, like bad debts, legal issues, and so on. This early discovery gives you time to fix what needs fixing so problems don’t affect the value of your business.
Step 2: Audit Your Business
For now, you don’t know who may be interested in your business. If, by chance, the potential buyer is a public company or private equity group, then be certain that they will ask for your financials. Mind you, these financials must be in line with generally accepted accounting principles.
That's why you may need to hire a CPA to run a full system audit. If some things are not in place, they may take years to fix, and you may not have the time for this. So, get this audit done as early as possible to properly position your company for a sale.
Step 3: Plan Early
If you’re looking at selling your business at any point in the future, we recommend preparing for the process at least three to five years in advance. We recommend creating a transition plan containing steps to transfer ownership and the processes needed to increase your business’ value. Some steps will require more time to implement than others, so you need time to prepare.
How to Value a Business to Sell
We can’t overstate the need for a business valuation, especially when approaching investors. Generally, a valuation involves calculating your business’ total worth. This requires you to consider your assets, earnings, and debts.
Knowing your business's value means telling investors, “My business is worth $X; so, if you want Y%, you’ll have to pay $Z.” Besides, if you don’t know how much your business is worth, how can you make a strong argument to investors? Here’s how to value a business to sell:
1. The Book Value Method
This is arguably the easiest method to calculate your business value, but be warned: because of how easy it is, this method is often unreliable. Regardless, to calculate using this method, simply subtract your company’s liabilities from its assets. Then, remove all intangible assets. Whatever you have left is the value of your company's tangible assets.
2. The Discounted Cash Flow Method
This method estimates a company’s value from how much it can make (cash flow) in the future. Again, this is a common but unpredictable method.
3. The Market Capitalization Method
This method is used to calculate the value of publicly traded companies. To calculate, simply multiply your total shares by the current share price. The downside here is that this method focuses only on the value of your company’s equity, whereas companies are made up of a mix of debt and equity.
4. The Enterprise Value Method
To calculate this, you must combine your company’s debt and equity, then subtract unused cash (i.e., the cash balance). For example, let’s say Ford has a market cap of $44.8bn, outstanding liabilities of $208.7bn, and a cash balance of $15.9bn. So, we can say that its enterprise value is approximately $237.6bn.
How to Sell Your Business
Buyers pay top dollar for high-quality businesses. So, how do you ensure your business pulls in all the money it can get? Here are some ways:
1. Research the Market
The first thing you must do is figure out how much your business is truly worth. This may require you to dig into market data and see what companies like yours have sold for in the past.
Once you have gotten a good understanding of the market, you can now estimate how much your business is worth and fix a price based on this estimate. This will also give you a realistic idea of what potential buyers may be willing to pay for your business.
2. Create a Business Plan
Next, you need a roadmap to direct each stage of the sales process. This is where a well-structured business plan comes in. Selling a business can get quite complicated, especially if it’s not something you’ve done before.
But with a business plan, you can set clear goals and timelines to help you manage the sale process. This business plan will make the sales process very clear and show potential buyers that your business is stable and heading in the right direction.
3. Consider Your Buyer Options
Now, you have to identify who your potential buyers are and understand their needs and expectations. Understand that you cannot have a one-size-fits-all approach, as each buyer will have specific expectations.
Whether they are individual investors, a group, or even your competitor(s), you must understand their needs and tailor your sales pitch to match those. This will not only help you get the best buyer for your business but also ensure a smooth transition after the sale.
4. Prepare Your Financials
After you have completed the first three steps, the next thing to do is gather all financial documents and organize them so they are easy to present to buyers. Here is where you must pay the most attention to details.
When your finances are well-organized, they show that you are transparent and honest, which can build trust with your potential buyers. It even helps to expedite the due diligence process because every serious buyer will do some investigations.
If your financial breakdown presents an accurate picture, you save buyers a lot of work. So, start gathering all your relevant financial documents, from profit and loss statements to tax returns.
5. Enhance Your Business’s Value
Identify areas of improvement that can increase your business’s value. For instance, you can address operational inefficiencies and make improvements where necessary.
These actions justify your asking price and can even make your business more attractive to potential buyers. We’re not saying to overhype your business up and tell tall tales; just brush up on places that need improvement, and your potential sale will go fine.
6. Select a Professional Team
Get a team of professionals who specialize in selling businesses. These may include accountants, attorneys, and even business brokers. You need their expertise to navigate the sale's legal, financial, and logistical aspects.
With a solid team working with you, the transition of ownership will be smoother than if you were doing it alone. Plus, negotiation is a sensitive part of this type of sale, and you need all the guidance you can get from experienced hands.
7. Negotiate the Sale
As we said earlier, negotiation is a very sensitive part of selling your business and can affect the money you’ll get for all your efforts. So, work with a professional negotiator to ensure you are getting the best possible price for your business.
8. Stay Organized and Focused
Stay organized throughout the process, from start to finish, and focus on achieving your goals. From time to time, go over your business plan, re-evaluate your projections, and adjust your strategies as needed. This will help you cut out unnecessary items and increase your chances of making a successful sale.
Move Your Business “Foreword”
Selling your business is a long-term process that needs solid preparation and strategic actions from the seller and buyer. But following the steps above can help you prepare your business for a smooth sale, get the money you deserve, and ensure the buyer enjoys what’s left of your business.
Thankfully, you don’t have to do any of these alone. So, why not schedule a call so we can discuss your business sale or exit strategy with you?
