Which scenario is likely to produce the higher sale price?
Your business is hot. Your products are well known. Your reputation in the market is stellar. Your sales force is motivated and productive, and your customer service reps are friendly and helpful. The bottom line has shown steady growth for the last few years.
Your business has slipped lately. Your products are still well known, but competition is squeezing your market share. Your bottom line has been stagnant or, worse, shows a downward trend.
Even if you are able to find a buyer for the business in the second scenario, the buyer will not be willing to pay a premium. Isn’t that what you ultimately desire? The highest price, one that reflects that hard work and sweat equity you put into the business? Will you fetch a premium that will allow you to move on to the next phase of your career: comfortable retirement, exciting new venture, perhaps philanthropy?
Buyers are not going to overpay for a business, and we do not expect any sellers to give their business away.
Buyers want to pay the lowest possible price for your business; you, of course, want to get the highest possible price. It is capitalism at its finest!
The business will sell for what it is worth, and it is up to you to make sure it is worth that highest amount to the buyers.
Obviously, it is best for you to sell your business when it is at its apex, when sales are high and profits are surging. Unfortunately, what we often see at the Benjamin Ross Group is an owner who loses focus and, as the business is slipping, decides to sell. That, my friends, is a recipe for certain disappointment.
Business owners interested in selling often urge me to consider the potential of their company. “I’m tired of the business,” they say. “The new owner can make a lot more money if they only….”
These owners are remembering what the business once was and are thinking of the potential it can have again. But the buyer is looking at the reality of the situation. “If this owner, with years of experience, is experiencing decreasing profits,” they reason, “how can I, with less experience in this field, turn the business around?”
Selling your business when it is on an upslope is very important. Sometimes with mature businesses, profits can be stable or flat, and a case can be made for the owner not wanting to expand, but timing remains extremely important.
The factors affecting timing are:
- when revenues and profits are up, or at least steady (for mature businesses)
- when there are a multitude of buyers
- when tax laws are favorable
- when financing is readily available to potential buyers
- when your industry is hot
One of the most frustrating situations to us is when business owners come into our offices and want to sell their business after they have “semi-retired.” Many, many times we have heard business owners say, “I am getting older and I wanted to slow down, so I let all my sales people go, and downsized to make my life easier.”
This is a very tough situation because now revenues have declined, the business systems are usually obsolete, and the owner does not have the energy or time to invest in reinvigorating the business. The owner then goes on to tell me “but the business has potential.”
Buyers will buy the business for the potential but will pay for the historical profits. Let me repeat that because it is so important: Buyers will buy the business for the potential but will pay for the historical profits. Buyers will not pay for the hard work (potential) that they have to invest to grow the business.
Sell the business when things are good, because you never know when something can happen. For example, a financial planner referred to us a business that needed to be sold quickly because the 35-year-old owner was diagnosed with terminal cancer. This was a very profitable business, and we were able to sell it quickly.
The owner did a good job, but if he had just implemented a few more strategies the company would have been in a better position in the event of an unexpected tragedy, such as his death – there would have been at least a couple hundred thousand dollars more that could have been left for the family.
At the opposite end of the spectrum, a client came to us recently with a timetable two-and-a half years out for selling his business. At the time he first approached us; his company was not sellable for a variety of reasons.
But because he did not have to sell at that particular moment, we were able to put together a strategic plan for him that placed the company in a better position to attract numerous motivated buyers. He made some internal changes that were transparent to the customer. Not only did he make his business sellable, but he also increased his profits during the time he was making it attractive to sell.
If you need help putting together a strategic plan, please contact the Benjamin Ross Group to speak with one of our advisors who can help you start the process.