If you are a business owner thinking about exit or succession, it may help to consider the following three questions as you begin the planning process.
Q.1: What is your objective in selling?
If you’re thinking about selling your business you need to be very sure – from the outset – of your objective in selling.
Why do you want to sell it?
- Do you want to sell because you’ve had the business for five years and the results have been poor?
- Do you want to sell because you’re over-exposed to borrowings, your cash flow is tight and you can’t see a way to get ahead?
- Do you want to sell because it’s time to retire or move on to the next stage of your career?
Be honest with yourself.
Your reasons for selling will help you create a negotiation framework to determine what an acceptable offer might be.
Going headlong into a business sale without having clarified your honest objectives, as well as your shareholders’, business partner’s and spouse’s objectives, is setting yourself up for disappointment.
Have a destination in mind
Once you’ve established your objective, write it down on a piece of paper and/or discuss it explicitly with your business partner, spouse and/or advisor.
That discussion process will allow you to pressure test your objectives.
We have observed numerous examples of business owners who are halfway down the sale process and experiencing huge frustration because suddenly they’re not sure whether the sales process is meeting their objectives or not.
This is usually because they weren’t clear about what their objectives were in the first instance.
Q.2: What is your business worth?
Once you’ve determined your objectives in selling, you need to pressure test them by getting a proper valuation of what your business is worth.
We talked about this in our Top 10 Do’s and Don’ts of Business Selling, where I shared the example of my first business sale – two retail businesses that had been on the market for eight years because they were grossly overpriced.
Getting a valuation as to the likely fair market value of your business is critical to making decisions against your objectives.
For example, if your objective is to retire and you need a certain amount of money to do that, then sure as eggs you want to know how the market will value your business.
If you don’t get a valuation you could find yourself investing significant time, effort and money in a sale process that doesn’t actually have a chance of meeting your needs.
Lack of valuations continues to baffle
As surprising as it may seem, it’s very common for people to put their business up for sale without first getting a professional valuation.
If you were selling your car, wouldn’t you do some research and at least find out:
- What is this make and model with this number of kilometres selling for today?
- If I get paid in cash versus paid in instalments for my car, is that good or bad?
A business sale is one of the largest transactions a person will be involved with in their lifetime.
Why would you trifle with that?
Q.3: What help do you need to sell it?
You know why you’re selling and what you want to achieve from the sale process.
You have a clear idea of the fair market value of your business.
The next step is: how are you going to sell it?
If you decide against self-marketing and, instead, plan to place your business sale in the hands of a professional business broker or advisor, how do you evaluate their abilities?
Choosing a business sale ‘partner’
If you think of a broker as simply someone who takes commission for selling your business, you’re not likely to get value from the relationship.
Working with an advisor or broker is a partnership.
In order to find the right partner I suggest you evaluate more than one advisor or broker to help you sell your business.
Our Top 10 Do’s and Don’ts included three key attributes to look for in a business broker, and these are:
- Experience
- Project management skills
- Communication skills
In order to determine whether your potential broker has these attributes I suggest asking for evidence:
- Ask them for examples of businesses like yours they have sold;
- Ask them for the shapes of the deals they’ve done with these businesses;
- Ask them for an indication of the process they intend to implement to sell your business;
- Ask them about the level of communication and reporting – verbal, written, formal and informal – that will be provided as part of the sale process to keep you abreast of progress; and,
- Ask them for referees you can speak to i.e. business owners they have worked with to sell their businesses.
Databases – size doesn’t matter
Brokers will often talk about their large database of potential clients who might be interested in your business. Make sure you pressure test the strength of that database.
Whether a broker has 10,000 contacts or 100 contacts on their database is really immaterial.
A broker’s strength is in the quality of the connections and relationships they have within your target market.
So the most important questions to ask your potential broker are: ‘Who do you think we would target in selling my business?’ and ‘What do these people look like?’
Here’s an example:
I own a large business in the construction sector, operating multi-projects on multi-sites. The business has a significant amount of heavy equipment.
I ask my broker:
- Who are you going to target as potential purchasers?
- Will you target my employees?
- Will you target my competitors who are looking to get onto the sites and into contracts I have?
- Will you target private equity firms looking to merge and acquire businesses like me to bulk up an offering for a potential IPO?
Asking those questions gives me a sense as to the genuineness of this broker in terms of their understanding of my industry and the relationships they have in my sector.
Of course, direct contacts aren’t the only means of driving interest.
Obviously there is also advertising and marketing and you need to get a full appreciation of the marketing program a broker will offer for marketing your business to the appropriate target markets.
Beware the international database
You’ll often hear brokers saying “we have great connections to international buyers from Asia, South Africa” and so on.
Remember, in selling anything, it’s about making a connection around the needs and wants of both parties, and the features and benefits of a product, in this case a business.
Be careful to evaluate the degree of difficulty around the connections that a broker or advisor might bring to look at your offering.
Be prepared to invest in your business sale
Finally, in terms of selecting someone to partner with you, don’t be afraid to invest some money in the sale of your business.
That old adage – you get what you pay for – holds true when selecting a partner to help with your business sale.
Don’t be closed off to considering an upfront investment in professional sale preparation support, documentation and/or marketing, and be sure this will be reflected in the ‘value’ of the service you receive.
From my experience, those business owners who are not prepared to invest in the sale of their business – one of the largest transactions they will ever make – are frugal to the point of foolishness.
If you need help with any aspect of selling your business, from marketing plans to sale negotiations, please contact the JPAbusiness team.
James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.