Judging When to Sell a Business

Last Updated Nov 27, 2007 12:55 PM EST

Why you're selling a business will determine how you should approach the task and what you can reasonably expect from an eventual deal. If you are selling so you can retire, for instance, you can wait for the best offer, even if you wind up waiting for a few years. On the other hand, if a business is in financial crisis, a quick sale may be imperative before you lose too much money—and that may mean accepting a lower selling price. A changing marketplace or technological changes can force a sale, too, as can other business-related reasons, such as diversification or outright bankruptcy. Whatever the reason, the key is recognizing that it is indeed time to sell.

What You Need to KnowWhen is the right time to sell?

Ideally, you should sell your business after a number of consecutive profitable years, so that prospective buyers can feel confident that the business is a strong, viable enterprise and that they can realistically project future earnings. The value and price of your business will be based largely on what a buyer expects to earn in the few years immediately following the acquisition. Depending on the business's sector, and the expectations of that sector's investors, a prospective buyer will want to ensure the business delivers at least an acceptable minimum rate of profitability so that the purchase price can be recovered within a given number of years. Obviously, the shorter the time the span, the more attractive the business will look.

If the business is not yet profitable or has suffered some money-losing years, consider rebuilding profitability for a few years before putting it on the market. Often this is the only way to rebuild at least some value for all the money invested in the business's marketing and product development, customer base, and sweat equity. Without some hard evidence of profitability or profit potential, you could find it difficult to put a realistic sale value on your business.

There's one other factor to consider: Can you foresee market or technological changes that will make your business less attractive or even obsolete in a few years? Are larger competitors eager to acquire smaller but successful rival firms? If so, it may be time to sell and cash in now.

Are there alternatives to selling?

Perhaps there are. If financial problems are forcing a sale or its consideration, first consider whether or not your business outlook really is so bleak. If you can just endure a difficult period, for example, will the future suddenly brighten thereafter?

Have you thought about other options? For example, might a new manager or partner help you deal better with finances or help tackle specific problems? Or, could a proven consultant help fix or eliminate outright a particularly troublesome operating condition or activity?

It is important to realistically compare the costs of selling with the costs of continuing. What is the most likely outcome of a sale, for instance? Will it truly solve your financial troubles? Look at alternatives such as the following:

  • selling assets (land, equipment or real estate, for example) and then leasing them back to the business to improve cash flow
  • adding a partner who will contribute fresh investment and tackle some responsibilities
  • scaling back operations to concentrate on what is most profitable
What about selling only part of the business?

Raising cash is often what motivates the sale of a business. But selling an entire business is a huge step and can often prevent you from profiting from the experience you gained in owning it. For one thing, it's common for a business sale to include a "restraint of trade" agreement that keeps you from competing in your old marketplace for one or more years. This may jeopardize your future and make it difficult to further develop your career as you intended. An alternative is to sell only part of your business to raise some cash—to be used to strengthen the operation that remains. Larger corporations do this almost as a matter of routine and wind up flourishing.

What to DoPrepare For Sale

When a sale is best, there are some business activities that you can usefully concentrate on to prepare for it. Here are the most important ones:

  • Reduce discretionary expenditures. Identify expenses that aren't essential to keep the business going. You don't necessarily have to eliminate all of them. Sometimes just pointing them out to potential buyers is sufficient (and can make the sale more appealing, too). Typical expenses include travel and entertainment, certain supplies and more expensive company vehicles.
  • Cut costs. Almost any expense can be trimmed, but it is important not to cut back in vital areas. Buyers will often look for consistent spending trends. A sudden and sharp cut in expenditures will stand out and may, in fact, undermine or wipe out altogether the positive effects you were hoping it would have on potential buyers.
  • Maintain your property and assets well. Have contracts and rental agreements available if you have leased property or office space. Keep equipment in good condition, too, even if it means spending dollars for maintenance.
  • Improve cash flow. For instance, reduce excess levels of stocks and supplies and make better use of working credit agreements.
  • Inform employees. Key workers' skills and experience are often the real strengths of a business. Understandably, a sale may worry them. Keep employees as informed as possible so rumors don't undermine a potential sale. Securing employees' loyalty is important and might be well worth offering incentives not to bolt.
  • Ensure customers and supplier loyalty. Long-term contracts can often do this, because both buyers and especially suppliers will want to maintain continuity. If your business operates under a licensing agreement of any kind, it is important to ensure it either will cover a potential buyer or can be amended to cover one.
Determine a Viable, Appealing Price

Valuing any business can be a challenge; valuing a small business can be especially difficult. For one thing, there probably is no stock involved that could be used to determine market value. Calculating a realistic value becomes a matter of studying the hard figures on balance sheets and operation statements, such as assets, liabilities, annual earnings and cash flow, plus the number of customers or clients, as well as more subjective figures like projected earnings, reputation, expertise, and the quality of management. Consider, too, external factors like current market conditions and the business's location. Ultimately, business value winds up being what both parties agree on. It's essential, then, to get expert help to make sure that you get the best price possible.

Check the Legalities

The legal status of the business for sale is critical, too, for it defines exactly who owns the assets to be sold. If you operate as a sole owner, all of a business's assets are yours, and you may sell them as you see fit. Partners, though, own a portion of the business and its assets, so any sale must reflect the provisions of the partnership—however it is defined. Legally, most companies are separate entities, and sales must be treated accordingly. Selling the business simply may be a matter of selling all or a percentage of it. Then again, it can become a complicated transaction. In turn, the experts consulted in any sale had better include lawyers.

What to AvoidYou Wait Too Long

You need to sell your business when the time is right. Perhaps the worst time to sell a business is once it is deep in debt. If you are forced into a sale, chances are you won't get a fair or reasonable price—even if your business is still profitable or breaking even. By taking on debts and perhaps operating losses, too, a buyer is also shouldering a substantial risk that the business will not respond to future actions. In turn, a prospective buyer will want to reduce risk by paying a lower price and keeping cash in reserve to fund possible future losses. This scenario means you need to plan as far ahead as possible to project market conditions when you anticipate selling your business. Clearly, it is far easier to command a premium price when a business is growing; a purchaser is more likely acknowledge a "blue-sky" value and be willing to pay for it. This is what's often labeled "an exit strategy."

You Set an Unrealistic Price

In determining your asking price, don't get carried away by the theoretical prospects of your business. While there may well be potential for a new investor to exploit, it must be compared with the hard realities of what your business can achieve—within your particular market at a given time. The finances and earnings of your business will be the foundation on which its value is based, so build your arguments on them, not on rosy scenarios or pie-in-the-sky ambitions.

Your Negotiations Become Protracted

Keep your negotiations about selling as short and simple as possible. If you can, set deadlines for certain key decisions about whom to sell to, sale terms and, to be sure, acceptable price. Doing so avoids the danger of letting the selling process drag on too long. Feelings of insecurity and anxiety among staff, customers, and suppliers are inevitable; that's why it is best for all parties to conclude a deal as quickly as possible.

You Assume There Will Be a Sale

A successful sale should never be a foregone conclusion. In truth, there is always the chance one might not occur, which means everyone will be expected to return to business as usual. After months of uncertainty, this is often more difficult than dealing with the aftermath of a sale, so plan for every contingency, including the status quo.

Where to Learn MoreBook:

Steingold, Fred. S. The Complete Guide to Selling a Business. NOLO, 2005.