5 Questions to Ask Before Selling Your Business
Succession planning probably isn’t high on the priority list of many business owners. After all, owners have many things to think about other than the day somebody else will be running their company. But this doesn’t make succession planning any less important.
It’s critical to think about the long-term future of your business — including after you have handed the leadership reins over to someone else. Long before you start the process of selling your business, ask yourself these five questions.
1. What are your post-business ownership plans?
How much thought have you given to what you’re going to do after you sell your business? Maybe you plan to retire and take it easy for a while. If so, you should work closely with a professional wealth advisor to develop a detailed retirement financial plan to help ensure that you have sufficient resources to support your desired retirement lifestyle.
Or maybe you want to start another company after you sell your existing business. In this case, you’ll want to make sure that the proceeds from the sale of your business are sufficient to launch your new venture.
You don’t have to start making those concrete plans just yet, but start with that big question: what do you want to do next?
2. To whom will you sell the business?
Business buyers usually fall into one of two broad categories: internal buyers or external buyers. An internal buyer may be your existing employees or management team, in which case the business sale could be conducted via an employee stock ownership plan (ESOP) or management buyout (MBO). If you have a family-run business, you may pass the business along to another managing family member.
There are two main types of external buyers: financial buyers and strategic buyers. Financial buyers, such as private equity groups, look for companies with high growth potential that they can later sell at a profit to reap a return on their investment. Strategic buyers, meanwhile, seek businesses whose products or services complement their own, such as a competitor. This kind of merger can help the buyer gain market share by acquiring your customer base and consolidating operations.
You don’t need to scope out a buyer today, but determining whether you would want to sell internally or externally can help you make decisions in the present. If you’re considering an internal sale, do you have a person(s) in mind at your current company that you could mentor now? If you’d rather sell externally, what value does your business hold for potential buyers?
3. How can you add value to the business before putting it on the market?
These are things you can do now to make your business more valuable in the eyes of buyers while reducing potential risks.
For example, you may ask the following:
- Are your corporate records, contracts and other legal documents all current and in good standing?
- Are your financial statements accurate and current, and is your technology up to date?
- Have you developed a seasoned and experienced management team that’s prepared (and financially incented) to help ensure a smooth transition to new ownership?
- Is there a realistic business growth plan in place that will enable buyers to realize positive ROI on their investment?
4. How much is your business worth?
This is the proverbial $64,000 question. Many owners think they have a good idea of what their business is worth based on their gut instinct or what their buddies at the country club sold their companies for. But this value often isn’t realistic. Most owners have an emotional connection to their business and tend to over-value the “sweat equity” they’ve put into building it.
Buyers will look at your business from a purely numbers and analytical approach. The main thing they’re looking at is the quality of business earnings and how repeatable these earnings are in the future. Therefore, it might make sense to engage a valuation professional to conduct a quality of earnings study to estimate the future cash flow potential of the business and come up with at least a rough business valuation.
5. Who will form your business advisory team?
Selling a business is a lengthy and complex process that requires high-level expertise. You should begin forming a business advisory team. This team should have an investment banking firm to market your business, a valuation professional to help you gauge business value and determine the selling price, an experienced M&A attorney, and a tax advisor specializing in selling closely held businesses.
Even if you’re not planning to sell your business anytime soon, it’s still smart to go ahead and start the business succession planning process now. This way, you’ll be ahead of the game when you’re ready to exit the business down the road.
