Three Considerations when Selling Your Business
Selling a business can be a tough decision to make. It can involve many considerations, including financial, family and legacy concerns. Before you decide to sell, it's crucial to understand the implications and weigh the pros and cons. In our view, here are the top three things to consider before selling your business:
Timing
Timing is critical when it comes to selling a business. The right timing can make a big difference in the sale price and the overall success of the transaction. There are several factors to consider when determining the right time to sell your business, including but not limited to:
Market Conditions: Consider the state of the market and any trends that could impact the sale of your business. Selling during a slow or down market may lead to lower offers, whereas selling during a time of growth may result in a higher price or at least a more competitive process. A professional advisor will help you evaluate the market conditions and if now is the “right” time to attempt a sale.
Performance: Evaluate the business's financial performance over the past few years. If the business has been struggling or not growing, it may be difficult to find a buyer willing to pay your expected price. If the business has been performing well, you may be able to attract more buyers and receive better offers. Oftentimes, the best time to sell is when you feel that business is doing exceptionally well and will likely continue to do so into the future. For example; selling immediately following the renewal of key client contracts could be an opportunity to extract maximum value for the business.
Disruption and Change: Are there changes coming to your business that could affect its future value? This could include changes in the industry, technology advancements, or regulatory changes. If you anticipate any significant changes or disruptions, it may be wise to consider selling to someone better equipped to handle them.
Valuation
Before selling (or deciding to sell) your business, you need to be comfortable with a realistic expectation of market value. This will help you set a reasonable asking price, negotiate with potential buyers, and understand the tax implications of the sale. Value expectations of owners do not always match the value expectations of buyers so it is vital to understand what a reasonable, market-tested, enterprise value for your business is.
Hiring a professional business broker, M&A advisor or investment bank (depending on the size of the company) should be your first step in determining fair market value. They will consider several factors, including the business's financial statements, operations, expertise, marketing position, industry trends, and the competitive landscape.
Oftentimes, the best time to sell is when you feel that business is doing exceptionally well and will likely continue to do so into the future
You and your advisor will extensively research recently reported sales in the industry to determine the valuation metrics used and how this can be applied to your business. Oftentimes this process will require “normalizing” historical financial statements to remove the effect of a single shareholder or private corporation tax planning adjustments on the business. This is important to ensure that standard profitability metrics deliver the maximum value to you for your business.
An advisor may also help you better prepare your business to capitalize on opportunities to maximize valuation by advising on operations decisions, such as capital investments.
Legacy
Selling a business can have a significant emotional impact on the owner who may have founded, worked in or benefited from the business over a long period of time. Before selling, consider the legacy of the business and any emotional attachment to it. Some of the key factors to consider here are:
Personal impact: You should be clear about your intentions with yourself (or the ownership group) and ensure you understand the reasons for the sale. Optimizing everything is difficult here, instead, you should strive for the best decision with the information available to you at the time.
Business continuation: Consider how you will view the business should it continue operating under new ownership and the impact that may have on you. If the business has been successful, you may want to ensure the brand lives on. This could involve finding a buyer who shares your vision for the business and is committed to its success. You may wish to avoid buyers who will “absorb” your company into theirs and remove its identity.
Emotional attachment: Selling a business can be an emotional process. You should take the time to reflect on your history with the business and consider the emotional impact of selling it. It's important to separate your emotional attachment from the financial considerations of the sale. A professional advisor, particularly one who has experience going through the process of selling their own business, can be critically important here to ensure that you maintain perspective.
Deciding, preparing and ultimately selling a business is a complex process. No matter your decision, you should always seek the help of professional advisors to guide you through the process and ensure a successful outcome. Peninsula Road is uniquely situated to provide “lived experience” advice to small and medium businesses that are either beginning their journey to sell or have made their decision already.
Want to have a conversation about if selling your business is the right decision? We’d love to help. Please reach out below for a confidential conversation.