by Bill Burnham | June 23, 2020
You have probably heard the adage, “Nothing lasts forever.” Though commonly associated with relationships, the axiom can also be applied to business. It doesn’t matter how successful a business may become, eventually, even good things must come to an end.
There may be a variety of reasons to exit the business, but before the owner puts out the for sale sign, there are some important things to consider.
The value of the business is usually the first consideration. There is a tendency among all of us to overestimate the value of our assets. This is true of our house, our car and even our time. It is certainly true when it comes to our business. It is important the value meets our expectations as the funds from the sale of the business may be the major portion of our retirement dollars. There are many factors that determine the value of a business. The most obvious of these is earnings, which will be calculated by a detailed review of financial results – typically the previous three years. Beyond earnings there many other things which may affect the value.
Among these are:
- The economy
- The industry
- The depth of the owner’s involvement
- Size of the buyer pool
- How long the company has been in business
- Age and condition of fixed assets
- Key employees
- Barriers of entry to the industry
- Customer concentration
A note on value as it relates to the economy. In times of severe economic downturn as is being experienced with the COVID-19 pandemic, values will be impacted more dramatically. This is due to several factors including declining financial performance of the business, lack of buyer base, and lack of financing options. Usually, the sales price is going to be based on a multiple of the earnings. All these factors will help determine the appropriate multiple to be used. Once the value is determined, the owner must decide if that value meets his or her expectations and needs. The answer to that may impact the next item to be considered.
Many believe the small business owner should begin planning their exit as soon as they start the business. In reality this rarely happens. Often it is a relatively sudden decision with no plan. Two basic questions should be asked. The first question to be considered is when do I want to exit? The answer might be in the next six months or perhaps a year, or maybe even five to 10 years down the road. To achieve maximum value, often longer is better.
No matter what that timeline may be, the owner must also ask how long it might take. As with the value there are many factors which impact the length of time it will take to sell a business once it is on the market. You may notice some of these are the same factors which impact the value. They include:
- The economy
- The industry
- Size of the buyer pool
- Availability of financing
- The selling price
As mentioned earlier concerning value, severe economic conditions, such as has been caused by COVID-19, will also impact the time it takes to sell a business. While under normal conditions, it is not uncommon for it to take six months to a year to sell a business, in hard economic conditions, the timeline can be much longer. Certainly, there are many instances where a sale will happen quicker, but there are also cases in which it will take much longer. The key points here are having both plan and the proper expectations when it comes to timing. With value and timing expectations both met, there is one final thing to consider.
Normally when we are selling something, we want as many people as possible to know so that the odds of a sale go up. This can be very detrimental when it comes to selling a business and many business owners struggle with this concept. It is important that the value of the business not be diminished during this time and there are multiple ways this can happen if confidentiality is not maintained. Knowledge of the business being for sale can be harmful if any of the following groups becomes aware:
Employees: Though it may seem like a harsh reality, it is imperative that the owner keep their decision from the employees. Remember, one of the factors in determining the value of the business are key employees and what they bring to the table. Those key employees may start to get nervous about the future of the company and decide to look for employment elsewhere if they know the business is for sale. If their roles are valuable to the company, the buyer may get nervous of the ramifications of losing those employees.
Clients: If clients discover the news of a potential sale, they may get nervous thinking of what the new owners may be like and whether they will be able to maintain the same relationship. This nervousness could lead to a reduction of sales, which devalues the business.
Competitors: The third group the owner must protect this information from is competitors. Competitors may attempt to soil the company’s reputation in an attempt to poach clients. Any loss of customers leads to a lower value for the business.
There are many reasons to sell a business. However, when it is time, it requires the same amount of planning and research that made the business successful to begin with.