There comes a time when you may decide to sell your business. Perhaps you want to move on to another venture or simply retire and travel the world. Whatever the case, you need to get the most value from your business.
However, selling a business is a complex ordeal. If you’re not prepared, you could end up getting less than what you were hoping for. Follow the steps outlined here to sell your business for maximum value.
1. Get a Valuation
A valuation helps you determine a fair value for your business based on factors like annual revenues and liabilities. Other factors like tangible assets (equipment) and intangible assets (intellectual property) will also affect your asking price.
Common valuation methods include:
- Market capitalization: This method involves multiplying your company’s share price by the total number of shares available.
- Times revenue method: This method involves taking annual revenues and multiplying them by a figure such as 0.5 or 3.
- Earnings multiplier: Also called the price-to-earnings ratio, this method involves multiplying a company’s profits by a certain figure to come up with a value.
This list is by no means exhaustive. Determining how much you can sell your business for isn’t an easy process, so working with a third-party valuation firm is strongly recommended.
2. Prepare Your Financials
Potential buyers are looking for a business with long-term viability. They’ll want to review your financial records before they even consider making an offer.
Here are the documents you’ll need to prepare ahead of time:
- Profit and loss statement
- Current balance sheet
- Cash flow statement
- Tax returns
- Insurance policies
Preparing these documents will take some time, but it can help you increase the value of your business and make potential buyers more comfortable with negotiating a deal.
Buyers often place more weight on financial records that have been evaluated by a qualified professional. Consider working with an accountant to organize and lend more credibility to your statements.
3. Repair Your Credit
Buyers understand that most companies have loans. But having significant debt payments will undoubtedly devalue your business. When that occurs, most buyers will think twice about making an offer.
Pay attention to your debt-to-capital ratio, which compares total debts to total capital. This ratio helps buyers gauge your company’s financial standing to determine their own risk. A debt-to-capital ratio of 0.5 is considered good.
To maximize the value of your business, take steps to pay off outstanding debt. Consider raising your prices, negotiating with vendors for better deals, and reducing your costs.
Reducing your debt-to-capital ratio can take some time, but you’ll be in a much better position when it comes time to sell. Make sure to also repair your credit under your company’s accounts before selling your business.
4. Diversify Your Revenue
Companies often specialize in certain products or services. It allows them to attract the right customers and command higher prices given their expertise. But having one revenue stream comes with increased risk — if it fails, then your business is in serious trouble.
To make your business more appealing to buyers and increase its value, you’ll want to diversify your revenue streams. Examples include offering new products and services and exploring e-commerce options if you operate a brick-and-mortar store.
5. Acquire More Assets
Assets are anything that has tangible value, such as property and equipment. They also help you run your business and generate revenue.
If you operate an online T-shirt business, a heat press machine would be an asset as you use it to add custom designs to your shirts. If you have a brick-and-mortar store, other assets can include building automation systems that monitor and reduce energy costs.
Acquiring assets that have a positive impact on your bottom line can add more value to your company. But take extra care here, as the last thing you want is to take on significant debt.
6. Optimize Your Systems
You can increase your asking price when demonstrating that your business is a well-oiled machine. Ensure that you have documented processes for any work that gets done. Who is responsible for what and when?
Keep in mind that any systems and software you have in place for automation of business processes are also assets that can boost your company’s value. Buyers will be more likely to pay more if your processes are automated.
7. Time Your Exit
You must plan your exit at least a year or two in advance. This will give you sufficient time to organize your paperwork, improve your sales, and find a qualified buyer.
Something else to consider is the timing of the sale. It may sound counter-intuitive, but the best time to sell a business is when revenues are increasing. A growing business is a much more attractive investment than one with declining profits.
If you’re in a strong financial position and you find a buyer, don’t delay the sale any longer. You can point to growing revenues to negotiate an even higher price.
8. Hire a Business Broker
Selling a business is a complex process. If you don’t know what you’re doing, you may end up getting less than what you want. To help you navigate this process and maximize the value of your business, it’s a good idea to hire a broker.
A business broker can help you:
- Valuate your business
- Find and vet potential buyers
- Conduct your due diligence
- Negotiate favorable terms
- Help buyers secure funding
Business brokers typically work off commissions, which means it’s also in their best interest to help you get the highest price possible for your company.
Seek referrals from trusted contacts to find a broker you can work with.
Conclusion
Selling your business for maximum value can be challenging. But if you follow the steps outlined here, you’ll be able to negotiate a higher asking price with potential buyers.
These steps include preparing your financials, diversifying your revenue, optimizing your systems, and hiring a broker. The more prepared you are, the more money you can make when it comes time to sell.
