Are you looking to be filthy rich?! Are you looking to get a 70-foot yacht to sail around Bermuda?
Where do you start? What is essential to making the most of your sale? It can be a daunting and time-consuming process (but don’t worry, I’ve got you covered).
Hi! My name is AJ, and I recently sold my business for several million dollars; and now my wife and I are traveling the globe while we help entrepreneurs like you.
I learned a lot throughout the sale of my business, so I put together some tips to share with other business owners to help maximize the value of a company and sell it for the most money.
Are you ready to become a bond villain? (Or at least live a comfortable retirement).
Key Takeaways
- Selling your business is a complex process that requires planning, preparation, and diligence.
- There are many different ways to value a business, so finding the right method for your business is essential.
- Streamlining processes and boosting sales can make your business more attractive to potential buyers.
- The process takes a lot of time, so starting early is essential
What are the Ways You Can Sell Your Business?
There are several ways to sell your business, each with advantages and disadvantages.
Before deciding which route to go, weigh the pros and cons of each option.
Mergers and Acquisitions
This option involves selling your company to a larger business or merging it with another business.
It can be a great way to get the most money for your business if you have a valuable asset attractive to a potential buyer.
The process of selling via this route takes time and requires a lot of paperwork, negotiation, and expertise, so you will need to do your research and hire a lawyer and financial expert to help you (but if you’re considering selling, you’ve probably already got those).
Selling Your Stake to a Partner/Investor
If you don’t own your entire business, selling your stake to a partner or investor is an option.
This is an excellent option because you are selling to someone familiar with the business and can help manage it going forward.
However, it would be best if you made sure that the terms of the sale are advantageous for both parties, so make sure to get professional advice before entering into a deal.
Family Business Succession
This is an excellent option if you are part of a family business and your children or other family members are interested in taking over.
This allows you to pass on the legacy of the business to your successors while enabling them to make their own decisions about how to run it.
It can be a great way to ensure business continuity while assuring you that it will remain in the family.
The downside is that you may not be able to get as much money for the sale since you’re not selling to an outside buyer.
Employee Buyout
If you have a loyal team of employees, they may be interested in buying your business.
This is an excellent option because it lets you keep the business going and ensures your employees have a stake in its success.
The downside is that you may get less money for the sale.
It can also be challenging to negotiate the terms of the sale since you’re dealing with your employees.
How Are Businesses Valued?
Businesses are typically valued by looking at their assets, liabilities, revenue, key stakeholders, and growth potential.
An experienced financial expert or appraiser can help you determine the fair market value of your business and help you get the most money when you go to sell it.
Many small business owners underestimate the value of their business and may end up selling it for much less than it is worth.
Small businesses are often more valuable than they appear on the surface due to their potential for growth and increased profits.
Below are some different ways your business can be valued.
1. Multiple on EBITA
This business valuation method is based on your business’s net income and takes into account operating costs, taxes, and debt payments.
The higher your company’s earnings before interest, taxes, and amortization (EBITA), the more money you can expect from a sale.
In simpler terms, this means that businesses with higher revenues and lower expenses will be worth more on the market.
*Potential buyers like to see a steady revenue stream and low overhead costs.
2. Multiple on Sellers Discretionary Earnings
This business valuation method is similar to the EBITA method but considers additional factors such as owner salary and benefits.
This way, you can get a more accurate estimate of how much your business is worth since it considers all sources of income and expenses.
It also allows you to understand better the potential returns a new prospective owner may receive.
*Think of this as a multiple on EBITDA with an ad back for the owner’s salary.
3. Revenue Multiplier
This business valuation method is based on your business’s total revenues.
It’s a more straightforward way to value your business since it only considers the revenue you generate.
However, this method does not consider any additional expenses or potential for growth, so it may not be as accurate as other methods.
It does, however, offer a quick and easy way to get an estimate of the value of your business.
4. Discounted Cash Flows
This business valuation method considers all your business’s cash flows, including future expected cash flow.
It is a more complex method, but it can give you an accurate idea of the actual value of your business over time.
By looking at the present and future value of your company’s cash flows, potential buyers can better understand what your business is worth and what kind of return they can expect.
It may be more time-consuming, but it can help you get the best price for your business.
Discounted Cashflows Formula
5. Book Value
This business valuation method is based on your company’s net book value, calculated by subtracting liabilities from assets.
It reasonably estimates the value of your company’s physical and intangible assets and its current cash flows.
However, it does not consider any potential for future growth or other intangible factors, so it may not be as accurate as other methods.
*Typically, you’ll get the least amount of money calculated off of book value.
How Much Do Businesses Sell For?
The amount of money you can get for your business depends on a variety of factors, including:
- Size and growth potential of your company
- Industry in which it operates
- Current market conditions
- The overall financial health of your business
- Negotiating power of the potential buyer
Service Businesses: 2-4x EBITDA
- Examples: Digital Agencies, Home Services Etc.
Tech Businesses: 4-10x EBITDA
- SaaS Companies, etc.
However, this is just an estimate – individual businesses may be worth much more or less depending on the situation.
It’s essential to remember that there is no one-size-fits-all formula when determining how much your business is worth – every sale is unique and will depend on many different factors.
Working with an experienced financial professional can help ensure that you get the most money for your business.
By understanding how businesses are valued and the different valuation methods, you can ensure that you get the most money for your business when it comes time to sell.
How Can You Make Your Business More Valuable
You can take several steps to make your business more valuable before you put it up for sale.
When someone buys a business, they buy cash flow, people, potential growth, AND your products and services.
1. Take Yourself Out of the Day to Day
If you are the founder of your business, it’s important to start transitioning yourself out of the day-to-day operations. Start working on your business instead of “in” your business.
This will give potential buyers the confidence that your business can run without you at the helm and make it more attractive in their eyes.
2. Increase EBITA
Increasing your EBITA is crucial to get the most money for your business.
This can be done by increasing revenue and/or reducing expenses.
For example, you can streamline processes, invest in automation, or look for other ways to reduce costs without sacrificing quality.
Reducing expenses increases your profits and makes your business more attractive to potential buyers.
3. Hire a Great Team
A great team of employees who can run your business without you is also essential.
This will ease prospective buyers’ concerns about taking on the company and give them peace of mind knowing they’re getting an experienced, capable team to work with.
Automate your business to run without you, and then invest in hiring and training the best team you can find.
4. Have an Excellent Product
Whatever you are selling, make sure it’s a top-notch product or service.
Having a great product that people want to buy can make your business much more valuable and attractive to interested buyers.
Focus on improving the quality of your products and services so buyers know they are getting something worth their money.
Your sales process and customer service should also be top-notch.
5. Improve Your Brand Image
Having a well-known brand name can make your business more valuable.
Focus on improving and optimizing your online presence to ensure you have an excellent reputation in the market.
Build relationships with customers and get them talking about your company’s products or services.
This will help increase your brand recognition, build customer loyalty, and make your business more attractive to potential buyers.
6. Sign New Contracts
It would be best to have your current clients (or vendors) sign new contracts for the next year or two before you sell your business.
This will give potential buyers confidence that your company will have a steady stream of customers in the future and make your business more attractive to them.
7. Have a Barrier to Entry (A Moat)
There are several different types of “moat.”
A moat is a metaphorical barrier to entry for your competition. By having a significant moat, it can make your company more attractive to potential buyers.
Types of Moats
- Brand Moats
- Cultural Moats
- Cost Moats
- Network Effects
- Resource Moats
How to Sell Your Business in Ten Steps
Once you have taken all the necessary steps to make your business more attractive, it’s time to start the process of selling.
The sales process can feel daunting, but by following these ten steps, you can easily navigate the process.
Step 1: Start with a Plan
To ensure a successful sale, you must have a plan.
Outline the steps needed, determine what you want from the sale, and decide who will be involved in the process.
Having an exit strategy in mind will help you to stay focused and organized throughout the process.
Step 2: Get a Current Valuation
A professional valuation of your business is crucial as it will give you an idea of how much money to expect from the sale.
A realistic idea of the potential value can help you set expectations for offers and negotiations.
As we discussed before, there are many different ways to value a business, so it’s important to consider each method and get as accurate a valuation as possible.
Step 3: Clean Up Your Financials
Your financial records will be one of the first things a potential buyer will look at, so it’s important to ensure they are accurate and current.
Ensure you have all necessary documentation prepared and organized to give prospective buyers an accurate picture of your finances.
Financial statements should be current and include any relevant tax returns.
Step 4: Streamline Processes
Review your internal processes and see if there are any areas you can streamline or automate to make your business more efficient.
By reducing overhead costs, you’ll present potential buyers with a more attractive business model.
Your business processes should be well-documented and easy to understand.
Step 5: True Up Business Contracts (If Applicable)
If you have any business contracts, make sure they are up-to-date and accurate.
Prospective buyers will want to know your current contracts and how they could affect their investment.
If you have contracts that expire soon, renew them before putting your business up for sale.
Step 6: Boost Your Sales
Increase your sales and revenue before the sale to make your business more attractive.
This can be done by focusing on marketing, acquiring new customers, and enhancing existing products or services.
By boosting your sales before the sale, you can show potential buyers you have a viable business model with room for growth.
Step 7: Find a Broker (Or Don’t)
Depending on the size and complexity of your business, it may be beneficial to hire a business broker or financial advisor.
Business brokers are professionals who specialize in buying and selling businesses.
They can help you structure the sale, negotiate offers, and guide you through the process.
However, if your business is small enough that you feel confident handling it yourself, then this might not be necessary.
In some cases, you might find a buyer, or a buyer might find you without the help of a broker.
What Does a Business Broker Cost?
A business broker will typically charge a percentage of the sale price.
This can range anywhere from 5-15%, depending on the size and complexity of your business.
You want to ensure you hire a reputable broker with experience in selling similar businesses.
Step 8: Pre-Qualify Your Buyers
When you’re ready to start talking to buyers, it’s essential to pre-qualify them to find the best possible deal.
Possible things to find out include:
- Financial situation
- Business experience and qualifications
- Motivation for wanting to purchase your business
- Potential conflicts of interest
- Plans for the company after the purchase
This will help you determine if they are a good fit for your company and if their goals align with yours.
Step 9: Due Diligence
Due diligence is an integral part of any business sale.
Once you’ve found a buyer, they will likely want to do their due diligence on the business to ensure it is what they expect.
This process includes financial audits, business process audits, and looking into all parts of how the company runs.
It’s important to provide buyers with all the necessary documentation, including financial statements, and answer their questions honestly during the due diligence process.
When you’re selling your business, it’s less time-consuming when you have all your financial documents ready.
Step 10: Finalize Your Contracts
Once you’ve chosen the right buyer and have agreed on a price, it’s time to finalize your contracts.
The buyer’s asking price should include any liabilities and assets that are part of the sale.
Your business broker or lawyer can help you finalize your contracts, as they can negotiate the best terms for the business sale.
It is important to be thorough in this process and make sure all details are covered.
How Long Does it Take to Sell a Business?
The answer to this depends on many factors, including the size and complexity of the business, how attractive it is to buyers, and the current market conditions.
On average, the process can take anywhere from 6 months to a year or more, but it generally follows this pattern.
Three Years Prior to Selling
- Creating Your Exit Strategy/Plan
- Getting a Current Valuation
Two Years Prior to Selling
- Clean Up Your Financials
- Streamline Processes
- True Up Business Contracts
- Boost Your Sales
One Year Prior to Selling
- Find a Broker (Or Don’t)
Six Months Prior to Selling
- Pre-qualify buyers
45 Days – 90 Days Prior to Selling
- Due Diligence
- Finalizing Contracts
- Closing
Closing Thoughts
Selling a business can be a lengthy and complicated process.
However, with the proper preparation and knowledge of the critical steps involved, you can ensure that you get the best price for your business and make a smooth transition to new ownership.
Let us know if we missed anything in the comments below. Good luck!
FAQs about topic
Yes, it is possible to sell a business without a broker. However, it can be beneficial to hire one as they have experience in buying and selling businesses and can provide you with guidance throughout the sale.
The average time it takes to sell a business can vary depending on the size and complexity of the company, market conditions, and how attractive the business is to buyers. On average, it may take anywhere from six months to a year or more.
It depends on the terms of your sale contract. Generally, buyers will ask you to sign a non-compete agreement as part of the sale. This means that you may not be able to compete in the same industry after the sale.
This is up to the new owner. Generally, they will keep employees on if it makes sense for them, but in some cases, they may decide to lay off certain positions. It’s best to speak with the buyer before signing any contracts and get an understanding of their plans for the business after the sale.
It depends on the buyer and how much due diligence they want to do. Having audited financials is helpful in the sale process and can give buyers a more accurate picture of the business’ financials before they purchase.