You have been building your business that you've put a lot of time, effort, and sweat equity into growing, and now you're looking to sell. Your objective is to get maximum value, and you're assessing steps to prepare for the sale. There are a multitude of variables to consider and in this post, we'll cover them all to help you maximize the price you receive when selling your business.
What a business is worth is relative to your individual business, the market and what potential buyers are willing to pay. However, there are some common questions to consider, including:
Part of the valuation process is looking at historical sales of similar businesses and comparing your business to those. The accepted valuation methodology by buyers is the multiple of earnings method. The multiple of earnings method calculates what the net profit of a company was for the last 12 months and then multiples that by a number between 1-4. Smaller companies sell in the 1-2X multiple range, medium in the 2-3X multiple range and large in the 3-4X multiple range. For example you have a transport company in Dallas Texas that makes $500,000 profit per year for the owner. That would sell in the 2-3X multiple range so between $1 million and $1.5 million dollars.
The amount a buyer is willing to pay for your business will all come down to two things, return-on-investment (ROI) and relative risk. The lower the risk, the higher the price and vice-versa. With that being said, what really makes your business worth more is mitigating the risk of the business failing in the future by having the following characteristics associated with your business:
There is never the 'perfect time' to sell your business. Sometimes you are forced to sell because of external circumstances; sometimes you get presented an offer that is too good to be true. However for the scope of this article the best time to sell your business is when there has been sustainable growth. Growth is tracked in yearly increments. Let's take the following example:
In the above example, the best time to sell would have been late in year three. You don't want to make the mistake of selling your business once you've lost interest, and the business is starting to decline. This can significantly impact the offers you receive.
Commons reasons we find owners selling their business:
The selling process of how to sell a business is fairly straightforward but can be more complex and take more time depending on the size of the business. In general, most sales will be structured like this:
The time it takes to sell a business depends on the individual business and terms of the deal. Generally though, larger deals (over $1 million) will take longer to sell than smaller deals (under $200k) because of the complexity of the business and also the risk that a buyer is taking. Industry reports say the average time to sell a business is 10 months.
They are a lot of potential buyers on the market for businesses. Through experience, many of them fall into one of the following personas:
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.