4 Questions You Had Better Be Ready to Answer if You Want to Sell Your Business
The number one rule of selling your business is be prepared. You only have one shot at presenting the right picture, and the one thing that will drive buyers away quickly is doubt surrounding your information or credibility. Buyers ask questions that require some introspection and others that may require the assistance of your investment banker. In any case, make sure you know the answers before you think about taking your business to market.
1. How Much Does the Business Make?
This might seem like an easy one to answer, but it can be quite tricky. When you think about how much money your business earns, you should take the time to figure out the answer with your investment banker and accountant. Do not simply hand over your financial statements to prospective buyers. Your financial statements used for a sale will need to be adjusted for one-time events, personal expenses that are being run through the business, and other non-recurring or extraordinary expenses.
While owners/operators focus on net income, operating income, and gross margin (and oftentimes cash) to gauge the profitability of their business, buyers focus on cash flow. For most, this is represented by EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). Most valuations are based on a multiple of EBITDA, so when considering what your business is worth, you must first derive the business’s cash flow.
2. How Will Your Business Grow in the Future?
Presenting a story of growth when you are selling your business is imperative. Most valuation models are more sensitive to the year-over-year revenue growth rate than any other factor.
Even if your business hasn’t grown under your leadership in the last couple of years, think about ways that it could grow in the future. Think about the things someone with unlimited capital and enthusiasm might do. Are there pieces of machinery you might add? Are there new markets you could enter? Are there companies that you could purchase? If you need additional capital or people to achieve these things, that’s fine, just let buyers know. The important part to convey is that there is growth potential for your business.
3. Why Are You Selling?
This isn’t a trick question and it works best when a seller answers honestly. A buyer wants to know that you aren’t leaving because the market for buggy whips is about to fall apart or because you are headed off to jail. Many of our clients are simply tired or want to spend more time with their grandchildren or at a vacation home.
4. Who Will Run the Business When You’re Gone?
Just as important as making sure your financials are ready for buyers to see, will be making sure you have a great management team in place. If you already have a great management team, do not be afraid to tout them as one of your most important assets. If parts of your management team need work, start beefing the team up or at the very least, acknowledge to a buyer that you have an area of weakness.
There is one common thread to selling your business: It will sell when the business owner, the business itself, and the market are ready to make it happen. Because so many things have to sync up in order to make a business sale successful, it is best to be prepared for that time.