Editor’s Note: The Inside Track is a recurring column written by a local business professional. Authors of these columns aim to provide you with their own perspective on a current trend or development within their industry, getting you on The Inside Track.
Benjamin Franklin once famously pointed out that nothing in life is certain, except death and taxes. But for business owners, there may be another certainty to consider: the day when you decide it’s time to move on – to take the next step in your life. There’s this great idea you’re envisioning as a terrific new business or some other important project.
For some, moving on will be an emotional decision; you’ve had enough of this business and need to do something else. Or maybe it’ll be about your health, or the health of someone important to you, such as a family member.
Then again, maybe it’s just time; you want to volunteer at a nonprofit you believe in, teach your grandchildren how to bait a hook, show them the wonders of Disney World or simply enjoy your freedom.
Whatever your reason, someday you’ll be ready to consider moving on. Which means you’ll probably want to look into preparing to sell your business.
But selling your business generally depends upon the answers to three very simple, very important questions:
- Do you have something to sell?
- Can you prove it’s worth buying?
- Can you find someone who’s interested?
Let’s take a look at these questions and see how they might affect your decision.
Do you have something to sell?
This question seems pretty obvious at first. Of course, you have something to sell; you have your business. But is it something that’s saleable? To answer that, you need to consider another question: Can your business operate without you?
For too many business owners, the answer to that question is a resounding “no.” Let’s look at a few other questions that will help you determine your answer:
- Does your sign have a business name on it, or is it your name?
- When customers call or stop by, do they insist on speaking with you personally?
- Do you have to put your touch on nearly every client project that comes through the door?
- When something doesn’t go as planned, do you have to make an “executive decision” to correct it?
If the answer to at least two of those questions is “yes,” your business is probably built around you. It can’t operate without you there.
Then what do you have to sell? You can’t sell yourself… well, maybe you can, but that would probably negate the value of selling, since you’d still have to be there.
So, if your business is built around you, all you have to sell is some used equipment and old inventory. That isn’t selling your business; that’s a fire sale. And you can be sure that you won’t get anywhere near what you’d like for your business if you don’t really have a business to sell.
Of course, if you own the building, you can still sell the real estate, but that probably won’t provide you with the numbers you were hoping for by selling your business.
Can you prove it’s worth buying?
For a business to be worth buying, it generally has to be making money. Is yours? And more importantly, can you prove it?
Every potential buyer will want to see your business records. They’re looking for a positive financial history, to prove that investing in your business will have the potential to return a profit. They need to know that the money they invest will pay dividends in a reasonable amount of time.
If your business records don’t show a reasonable profit, you can’t prove your business is successful to a prospective buyer. Remember, those people – and their bankers – want to see the books before they plunk down big bucks to buy your business.
As unfortunate as it may sound, if you want to sell your business for top dollar, you need to prove it’s a cash cow. And that depends on the numbers on your tax returns.
If you’ve been altering your bottom line on paper to reduce your tax liability, there’s a good chance you’ll never be able to satisfy your buyer’s due diligence. You may still be able to sell, but not for anything near what you were hoping for.
Can you find someone who’s interested?
Okay, so far, we’ve covered the first two questions. Chances are you’ve discovered you have a lot of problems that you’re going to need to correct if you have any hopes of selling your business. If you were hoping to sell tomorrow, those problems may limit your potential sales.
But it doesn’t completely close the door: There still may be a way for you to find a buyer for your business. It just means your potential market will be smaller – a lot smaller.
You may have one (or more) current or former employee(s) whom you could work with to improve the business’ value. First, have them become a manager, then a partner and eventually buy you out. In fact, helping someone you know improve the business and buy you out could be an excellent strategy.
Or it could be a technician in your field who’s not an employee, but someone looking to open his (or her) own business. And, if your numbers aren’t completely accurate, you’ll have to find one who’s willing to make a judgment based on observation, rather than the existing records.
If you’re reading this for your future – say five or ten years from now – you still have time to make changes to your business to create a more turnkey situation. When it comes to the numbers, most potential buyers are only going to look back a few years. So, you have time to make the changes necessary, to show you have a saleable business.
The objective is to create a model that works for anyone who’s interested in owning a business. As long as they can provide the money and are willing to become familiar with the market, your business is a realistic option for them.
From there, you need to move on to the final step: finding a potential buyer. Now, you could try to do that yourself, with ads in industry magazines and web-based business resources. But, chances are, you’ll only reach a fraction of the people who might be interested in your business.
You could hire a business broker, but a better idea is to hire a consultant with expert knowledge in increasing the business value and getting it ready for sale. Such a consultant can show you all your options while still leaving you in control of your future.
The differences between each business and owner’s circumstances are so varied you will need specifics on what would be best for you and your business. General how-to-sell information is good, but there is more to the transaction than just the sales price, such as net proceeds after taxes.
Even if you aren’t anywhere near ready to consider moving on, this is the time to start building a workable business model that can make an exit possible when the time comes.
While old Ben may have been right when he commented on death and taxes, it just makes sense to recognize that one day you’ll certainly want to sell your business. The best way to make sure that happens successfully is to start preparing for it now.
John E. Anderson is the CEO of Longview-based Be Cause Business Resources. He currently serves as chapter president for the Institute of Management Consultant (IMCUSA.org), Oregon and Washington, is a mentor in the WSU Business Growth Mentor & Analysis Program and a management instructor at the WSU Carson College of Business.