Author, Insider 94 staff
There are two eventualities in owning a business. At some point, it will either change hands or it will close. Since letting a business close is not ideal, most business owners must figure out the best time to step back from their company and either sell it to a new owner or let a new management team take over. This decision is a critical part of developing an exit strategy that optimizes the value of a company without compromising its financial health.
There are a variety of reasons why a small business owner may choose to sell. This decision can be due to personal or financial events, but more often than not it is a challenging determination that owners can struggle with for years. Establishing a time frame involves a delicate balance between letting go and moving forward. Owners are emotionally invested in their businesses and walking away is a tough call. Recognizing signs that can indicate it is time to sell can make the process a bit easier.
Here are 10 signs to help you tell when it’s time to sell (and what to do about it):
- Financial Struggles: If your business is struggling financially, it may be time to consider selling it. If you’re having difficulty meeting expenses, paying bills, or increasing revenue, it could be a sign that it is time for new ownership. Consulting with a firm that does Quality of Earnings reporting as part of Operational Diligence (which probably has to be done when you sell any way) to improve operational efficiencies, which ultimately lead to increasing value, is incredibly beneficial and can increase the market value prior to selling. Operational Diligence is a proven process for increasing value in a wide range of industries/sectors.
- Lagging Growth: During the startup years growth can be fast and furious (and fun!). Over time, as the small business stabilizes, growth can become drastically slower. If the balance sheet is becoming less positive than previous years, it might be time to consider selling, but you have options. Consulting with a mergers and acquisitions (M&A) advisor connects business owners with private equity (PE) buyers. A PE firm invests in companies with lagging growth to inject immediate cash flow and make operational changes that drive growth. The private equity firm will conduct due diligence on your company, establish a business plan to increase market value, and eventually sell it for a larger profit.
- Lack of Motivation: Running a business can be a long and challenging journey, sometimes taking a toll on owners both physically and mentally. If you’ve lost your motivation, feel worn out, or you’re no longer passionate about your business or interested in growing it, it may be time to sell it. Start creating your exit plan and consult with an experienced business Broker to ensure you get the most value for your business.
- Lack of Resources: If your business is struggling to obtain the resources it needs to be successful, it could be time to find a new owner. Without access to capital, labor, updated equipment, or current technology, your business cannot flourish. Selling to an owner who can bring in the necessary funding for improvements might be your best option, especially if your business still has the capacity for growth (as many buyers will purchase based on potential earnings). Consult with a both a Broker and M&A expert to determine your best options and consider which is best for you in this type of situation.
- Investing in a New Opportunity: A business owner may eventually want to pursue other business opportunities or personal endeavors that lie outside of the existing business. If you’re missing out because of your current business, it may be time to consider selling it. Selling a business can fund a new enterprise or allow the owner the time and funds to pursue other life aspirations, like continuing education or travel. If you want to sell for these reasons, create your exit strategy and consult a Broker to help facilitate the process and get you the offer you need to start a new chapter.
- Unreliable Suppliers and/or Employees: Unreliable suppliers and/or employees are often a sign that it’s time for business owners to consider selling their business. Suppliers that don’t deliver on time or consistently provide poor products can significantly impact a business and be a struggle to replace. Likewise, poorly trained, or unmotivated employees can cause decreases in productivity and contribute to customer service issues, and replacing them can be a daunting task. If you are not up for the hard work it takes to overcome these issues, it might be time to let a new owner buy your business. Obtaining an expert valuation form an experienced Broker can help you determine your company’s current market value so you can decide if selling in your best option.
- Industry Changes: Industries evolve over time and can sometimes change in a way that is undesirable to a business owner. If the current state of your company’s industry has become uninteresting or unenjoyable to you, having changed drastically from when you started, then you could consider selling. Working in an industry that no longer drives your passion can lead to stress and burnout, ultimately impacting the company in negative ways. Consult with a Broker to help you create an exit strategy, sell, and move on to a different opportunity.
- Offers: Sometimes business owners get an offer they cannot refuse. If you get an unexpected offer that exceeds business valuation, it could be wise to accept it, especially if the market value of the business is expected to decrease in the near future. Plus, if current interest rates are elevated, the sale could lead to lower taxes. Speak with a CPA and a Financial Advisor to ensure that accepting the offer will be beneficial in the long run and address any financial or tax matters related to the transaction.
- Partner/Leadership Discontent: If the leadership team has turmoil, selling could be a consideration. There are several situations, such as partner disputes, divorces, and other personal issues, which can lead to the owner wanting to sell. When something like this happens, time pressures can be high, necessitating prompt attention to reaching a sale price and swiftly moving on to other prospects. Be sure to seek the expertise of a certified business broker, CPA, and attorney to ensure a successful sale.
- Retirement: After years of hard work, most entrepreneurs will retire to relax and enjoy life. This can be made possible by the liquidity of a business sale, allowing the an owner to forego active saving if the sale price is right. Even young entrepreneurs could become financially independent and stop working with a successful sale. If you eventually want to retire, developing an exit strategy with that in mind is imperative. Consult your attorney and find a Broker who can help you determine when the market is favorablefor selling and for your retirement to commence.
Once you’ve identified the signs that it is time to sell your business, the next step is to decide how you want to do it. There are several options to contemplate:
- You could sell it outright with the help of a Broker.
- You could sell to PE investors if you would like to take on a lesser role and reap the benefit of a higher sale price due to this type of deal.
- You could find a business partner who can take it over and help you to manage it, eventually selling to that partner when the time is right.
- You could implement a Succession Plan to transfer ownership to employees, a family member, or management team. This is often easier than selling to a brand new owner because your business can buy you out and you only have to consult with a CPA to figure out the tax implications.
Once you’ve assessed your options, create a plan and prepare to sell. This will ensure you maximize the market value of your business so you can negotiate the best terms for a successful sale.