Thinking about selling your business?
Take the “Sale Probability” Test!
By Donn Eurich, President, Eurich Management Services, LLC
As a business owner, some day you will be faced with the decision as to when and how to sell your business. You may not have siblings or children who can take over and continue the time commitment and effort you have given for so many years. When you decide you are ready to sell, you will need to make some difficult decisions, and face some potentially unpleasant realities. Take the “Sale Probability Test” below and measure your readiness for this important decision. Keep track of whether you agree or disagree with the following statements:
- I will sell when sales are highest. That’s right, when sales are up! To maximize the value of your business, you cannot wait until economic times are tough, you are drowning in debt, your health is failing, and you need to conduct a fire sale. Most owners wait until they are struggling, then expect to get top dollar for their business when they sell. Declining sales and low profits do not yield attractive offers. The value of your business is highest when it is growing and profitable.
I keep accurate books. Are you recording all business transactions? Can you compare sales and actual expenses from month to month and year to year? Does your CPA conduct an annual compilation of your financial year to ensure you are making decisions based on accurate information? You will lose credibility with a potential buyer if you keep sloppy records, and if the buyer is not comfortable with your financial presentation.
I keep factual books. By factual, we mean you are not running personal furniture purchases through the business, your child’s college tuition or other unrelated expenses which lower profits. Whispering into a buyer’s ear that sales are actually 20% higher, or expenses are 20% lower than recorded will cost you in the long run. The small tax savings you realized over the years with those “special” deductions will lower your ability to justify the asking price you know the business is worth. A buyer cannot borrow from a bank based on your promise that actual sales are higher than recorded.
I am realistic about the value of my business. We know you have built the business from nothing. We know you have slaved and sweated for 20+ years. The problem is, the buyer doesn’t care. He is looking for a return on his investment. Ask yourself this question; Would I be willing to personally pay my asking price for my business? If you answer “no”, so will your potential buyer.
I will obtain a professional valuation of my business and real estate. This question follows question 4 for a reason. Some owners don’t want to pay for a professional valuation, as they are afraid the numbers will come back too low for their taste. You gain tremendous credibility with a buyer who is not intimately familiar with your business or industry by providing a professional, independent business valuation which demonstrates the validity of your asking price. There is no stronger tool available to you to justify your price than a professional business valuation.
I will be flexible with financing options. It would be great to get 50% down and have that huge chunk of cash to spend and enjoy! Most investors want to put down as little cash as possible to leverage their return on investment, while keeping the debt load they are willing to carry supportable by business revenue. If financing options are limited, don’t close the door to carrying some of the debt as a land contract, or negotiating a trade of real estate or other holdings as a form of partial payment.
I will not “go it alone” when selling. There are some business owners who have been trying to “sell” for years, but have had absolutely no success because the only tell close friends they are interested in selling. Often they do not even have an asking price in mind, but simply tell prospects to “make an offer”. Smart business people do not buy companies on a whim, nor are they comfortable making such a major decision based on a handshake and promise. Working with a professional business broker will greatly increase your odds of making a successful, equitable sale.
I will not let my emotions or ego derail a good deal. What! He only offered me 70% of my asking price? That is an insult! Maybe, maybe not. Serious buyers make serious offers. Run the numbers. When you calculate the debt the buyer must carry to make the deal work, will your business support that payment? Your business must be able to support some debt retirement in order to be attractive to investors. You must look at each offer unemotionally and understand the buyer’s position, motivation and capabilities. You also can’t balk if a buyer wants to remodel, close or redirect your business. While most business owners would like to see their business continue in its current form, often that is not possible or feasible. Understand that a new owner will make whatever changes they deem necessary to make money.
I understand my buyer may be my current competitor. The most logical buyer for your business is someone already in your industry. A competitor in your town may be interested in buying your business to operate as an additional location, target market to your customer list or simply reduce competition. Often a supplier to your business may have an executive or sales representative who wants to enter your side of the industry. You may find your industry publications are good resources to find investors or other contacts to help you sell.
I will retain professional business broker representation to help me with this process. Some business owners are lucky enough to find a buyer and make a deal work without professional help. The first question we would ask these sellers is, “how do you know you sold for what your company is worth?” Without a professional business valuation, comparisons to other similar business transactions and the research to find the most profitable deal, there is no way of knowing how much in additional selling price a personal sale may have cost the seller. Some real estate companies and individuals specialize in business brokerage and matching buyers to sellers. You will find your profit potential and likelihood of success increases dramatically when utilizing the vast resources a professional business broker can provide.
Well, how did you do? If you answered “yes” to 8-10 of the questions, you are a good candidate to successfully sell your business at a fair price to all parties. If you answered 5-7 questions in the affirmative, you are not quite ready to sell, as you still have some unresolved issues with the process. If you answered 5 or fewer questions as “yes”, you are not really interested in selling at this time, as you are permitting too many obstacles to stand in the way of a deal. That’s okay, keep on retaking this test! When you ultimately decide the time is right to sell, your responses will reflect your readiness!
Donnelly K. Eurich, CAE, CMP is President of Eurich Management Services, LLC, an association management, lobbying and business consulting firm. His client associations represent more than 12,000 businesses in Michigan and the Midwest. Eurich Management sponsors business brokerage services through Tim Beckwith and RE/MAX.