Get the Maximum from Selling Your Business
It takes years of plan and hard work to build a successful business. Many of the successful business owners have invested more than just financial resources to build a profitable business. They have sidelined other priorities and toiled hard to materialize their dream of being successful business persons. So, when you plan to sell your business, there are quite a few things that need to be considered.
You need to know how you are planning to get the value that you want from selling the business. It is important to consider the time you choose to sell your business. Besides, you should have a clear idea about getting the right price for your business. You need to prepare your business for sale so that it attracts the prospective buyers. It will take at least a year to prepare the business for sale. Show the potential buyers the value of your business by indicating the profit they can gain from acquiring your business.
Factors determining sale price
There are two standard methods that are commonly used for valuing a particular business. The first one is Multiples of Earnings Method: [(Multiple) Past Average PBIT] + Goodwill + Stock at Valuation.
The second is the DEF Method: NVP (Net Present Value) of the cash flows in the future + Net Assets
Where:
PBIT = Profit Before Interest and Tax
NVP cash flows in the future = Sum of cash flows in the next 3-5 years adjusted for cost of capital.
The Multiple depends on the nature of the business acquired, profitability and the security of cash flows in the future. Goodwill refers to the surety of the cash flows based either on the new earning opportunities or on the loyalty of the consumers, and secured contacts.
Factors that confuse prospective buyers
Besides price, there are few other factors that deter the buyers. If there is in uncertainty in the future cash flow, not many will be prepared to buy your business. The prospective buyers need to be assured that the business will certainly fetch profits.
If the business system and the business operations are too complex, people will be reluctant to acquire your business. Uncertainties that hover over the industry, various modifications in the regulations, and the changes in trends within the industry may also discourage potential buyers. Another factor that prevents potential customers from buying your business is excessive debt within your business. Also, if the buyers realize that your business is excessively dependent on you or your staff to make profit, they may not be interested to buy it. If the business if heavily dependent on the owner, the buyers may feel that when it is transferred there will be losses.
Most of the buyers will have a few strategies to increase the business or to reduce the cost when they plan to acquire a new business. You can also encourage buyers by showing them how the skills, knowledge and contacts will be transferred to them when they acquire your business.
Successfully Sell Your Business for the Price You Desire
You will be able to sell your business profitably if you can successfully demonstrate the certainty of cash flow in the future, clarity of vision in your business plan and lack of dependence of the business on anyone including yourself. This is not an easy process. It takes much time and deliberation as it is not possible for you to bring changes in your business overnight. You need to take at least two years to make your business ready for sale. But often this is too far fetched for most of the business owners.
Ideally it will take nearly six months to show the hidden value that you know your business has and to convert the business into value proposition for the prospective buyers. A one year period is preferable to reorganize and transform the business so that your prospective buyer will have a record of stable improvement to begin the work from. The financial statements will indicate clearly the improvement in profits. If your business is in a financially stable position and assures profit to the potential buyer, you will receive an increased price.
How to get the price you desire for your business
You need to design a clear succession plan, indicating the skills that are essential for the business and how these skills will be transferred across the staff. The plan should also show how the owner's skills will be transferred during or even after the sale. You need to also boost earnings in the business to show how much profit a potential buyer will be able to make when he/she acquires your business. Make your balance sheet clean to show how the debts and assets are effectively managed. You should also clearly show from where the major share of the profit is generated. This should be indicated in the profit and loss statement (P&L) as well. It is also beneficial to explore strategic links with other businesses that are in the supply chain.
It is essential to develop action plans which show where the opportunities for improvement lie. The plans should indicate the actions that need to be implemented to take full advantage of the various opportunities that are available. Preferably the best buyer is the one who has been associated with your business for some time because such buyer will full understand the various aspects of your business and the risks that are involved in it. So, it is beneficial to develop a strategy to link your business with other businesses as these could be potential buyers who will offer you the best price.
You need to strategically look at your business and understand how the profit is obtained. Only when you are clear about this, you will be able to demonstrate it to your potential buyers. A mere peripheral change will not make your business attractive to buyers. The business should show performance and profit that justifies the price you demand for it.
Do not make hasty decisions
Buying a new business is a huge investment for any company. Hence the potential buyers will take much time to consider the various aspects of your business and make their own plans as to how to derive maximum profit from this new investment. Wait patiently and allow the prospective buyers to take their time to make a decision. If you rush to sell your business, you may not be able to get the value that you actually demand. Show the buyers that you have a successful business that assures profits and you will receive the due value for your business.
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