How To Sell Your Small Business
If you ever watched an HGTV renovation show, you will have a general idea of the need for improvement prior to selling your home. Selling a business follows the same logic. Whatever business you are selling requires a beautification process all in an effort of increasing the value and making the exchange of ownership as seamless as possible.
Prepare For the Company To Be Sold At Least Two Years In Advance...If Not Longer
It is typically advisable to think of your exit before you even start your company. Unfortunately, none of us can live forever. If you have a strong idea of how you want to transition or exit your business, it will help you make the right decisions. For instance, if you start a bakery with a goal of selling at premium dollar fifteen years later, you may decide to grow aggressively by franchising or growing your locations. However,if you just want your business to provide you with a good life and you may pass it on to your family members, you may not be aggressive with your strategy.
Buyers typically like to see consistent revenue growth for three consecutive years; so, spending more effort on increased revenue and cutting costs to improve your bottom line will increase your selling price.
Clean Up Your Bookkeeping
Much like cleaning and decluttering your home prior to placing it on the market, the same holds true for a small business. The years leading up to the sale should be spent ensuring your bookkeeping is sound and that it genuinely reflects the value of your company.
Furthermore, if you’ve had the habit of dipping into your company accounts without documenting it, this will be the ideal time to kick the habit. You’re not showing the true expense of the company. Keep it separate.
Increase Your Brand
Sure your company may be worth $100,000 but if you have a trademarked name, secret ingredients for your lipstick, and a large customer following, it may be worth much more. Find ways to increase your ownership, both tangible and non-tangible. If you are in construction, owning your property and equipment adds to the value of the company. If you have a services business, owning a method, software program, system, or contacts goes a long way as well.
Find the Multiplier For Your Industry
Have you seen Shark Tank? If you haven’t seen it, the show has a panel of investors who are seeking to invest in a business that an entrepreneur pitches. Oftentimes they would ask for the revenue of the company. They usually wouldn’t say revenues, they would say, “How much did you make?”
They would use the given amount to value the company. So, if you are asking for $100,000 for a 10% ownership of the company, you should be making at least $1MM. In the purpose of selling your business, most buyers or brokers would use a multiple of your net profit. So, after expense, if you are making $800,000 consistently over three years, a buyer may offer you a multiple of 1.0x or $800,000 for your business. Depending on other factors such as your industry, competitors, company assets, age of business, they may use a higher multiple. If you are in a stable industry with a growing demand, you may get a 1.25 multiple or even higher.
Be Flexible of the Types of Transition
After selling your business, you may want to retire in the Caribbean, or you may want to stick around to help with the transition. Furthermore, you may not get that entire selling price in one check, you may be flexible and accept installment payments over a number of years.
The above tips will help you transition your labor of love effectively.