Every small business’s dream is to become part of a bigger conglomerate. It’s the exit strategy of some CEOs out there, but is it as easy as it sounds?
The reality is that your business is more likely to fail before you have the chance to sell it to someone. Most small businesses fail in the fifth year, and only a fraction of companies reach the ten-year mark.
You must understand that buyers want a business already generating revenue, and it usually takes a business that’s been through the start-up period, which is between five to ten years. They’re not interested in taking on a new venture with all the associated risks that come with it. So, unless you have a proven track record, it will be challenging to find buyers willing to pay top dollar for your business.
Here are three essential things you need to know when selling your business.
Make Sure It’s Making a Profit
Buyers don’t want to get a business that’s losing money. They want to get a return on their investment, so that they will be looking for companies already generating revenue and profit.
You need to make sure that your business is in good financial shape before you start looking for buyers. This means getting your books in order and ensuring you have audited financial statements for the last few years.
You should also clearly understand your costs, such as your inventory costs, employee salaries, and overhead expenses. All these factors will impact how much profit your business is making and ultimately affect how much you can sell your business for.
If your company isn’t making a profit yet, then you’ll need to be honest with potential buyers about your financial situation. They’ll be more likely to take a chance on your business if they feel like they’re getting a good deal, so don’t try to inflate your numbers.
Get a Good Valuation
It’s essential to get a realistic valuation of your business before you start trying to sell it. There are a few different ways to do this, but using a multiple of your annual revenue is the most common.
For example, if your business generates $1 million in revenue each year, and you sell it for a multiple of three, then you would get $3 million for your business.
Another way to value your business is to use a multiple of your EBITDA, which is your earnings before interest, taxes, depreciation, and amortization. This number is a good indication of your business’s profitability. In addition, it will give potential buyers a clear picture of how much money they can expect to make if they purchase your business.
Getting a reasonable valuation can be tricky, so you might need a professional to help you. You can hire a CFO advisor to help you with this. Most small businesses can’t afford a CFO, but now you can. With an advisor like this, you can easily look into your books and develop a fair valuation for you and your potential buyer.
Get Your Legal Affairs in Order
If you’re serious about selling your business, you must get your legal affairs in order. This means having all your contracts and agreements in place, as well as any licenses or permits required to operate your business.
You should also have a solid understanding of your intellectual property, such as your trademarks and copyrights. These are valuable assets you can sell along with your business, so it’s essential to ensure that you have the proper documentation in place. In addition, it might be the main reason why your business is being purchased in the first place. Take Disney’s acquisition of Marvel, for example.
Disney only purchased the almost bankrupt superhero company because they wanted access to their superheroes, hence the acquisition happening earlier this decade. Your potential buyers might wish to access your intellectual rights, which might be why they want to buy your business.
Buyers will also want proof that your business complies with all relevant laws and regulations. This includes things like health and safety regulations, as well as environmental laws.
If you’re unsure about any of this, you should consult with a lawyer specializing in business law. They can help you get everything in order and ensure you’re not missing anything important.
To sell your business, you must ensure that it’s in good financial shape and that you have all of your legal affairs in order. You should also get a realistic valuation of your business to know what to expect when selling. By doing these things, you can increase your chances of successfully selling your business.
