Running a business that makes money and is healthy is extremely satisfying. For some though, selling a business especially for a profit can be even more satisfying. In my case, I wanted to move on to other projects and I had built solid businesses over the years so I decided to find a suitor to purchase them.
Regardless of what your motive for selling a business is, I share my handbook on what it takes to turn a profit for your company in this article. Surprisingly, anyone can sell a business for a profit as long as they have the right mindset, approach and rationality when it comes to the entire process.
Here are some tips on how I sold 2 companies for a profit in the last 5 years:
1. Know When It’s The Right Time To Sell Your Business
Entrepreneurs often rely on the gut feeling of when the time is right. You can quite often get a feel for your business, you can see what’s coming and you can see when it may be a good time to sell out. Timing is crucial to successfully sell your business for a profit.
There is no right answer to determining when it is the right time to sell your business. Look at the overall landscape of other businesses in your industry and see how you feel internally about your business. I sold one of my businesses purely based on the speculation that I had grown it as much as I possibly could while I sold another business because I saw other competitors getting bought out in our industry. It’s really about gauging internal and external factors to make a decision.
2. Set Realistic Pricing Expectations
Everyone on the company side should understand and accept an honest valuation. Setting these expectations early after doing the proper due diligence will help keep everyone in the ownership team united. You’re obviously going to negotiate for the best price position with potential acquirers, but you want to keep a realistic number in mind for the valuation of your business.
Often times, your acceptance of the actual value of the business may be hindered because of your bias to your own business. Every founder in the world will always overvalue their business. My founding team felt the same way on numerous occasions so we decided to bring in a 3rd party valuator who had zero bias to give us a value for our business. This helped lower everyone’s expectations and set everyone back to reality.
3. Hire A Broker
When it’s time to sell, you can always find a business broker to help you. Professional brokers are already connected to buyers and investors. Their entire business depends on presenting your business in the best possible light to the right buyer. They also know how to present financials and prepare you for the type of questions a buyer will likely ask. However, be prepared, their fees will vary and can range from 7-12% of the final sale price or $10,000 flat.
For my first business, I hired a broker to help me out with the selling process. Especially because I had no experience in selling a business, I thought it would be a great idea to get a broker. It was very helpful and we were able to successfully sell our business after a few months of searching!
4. Stage Your Company And Yourself
Your company should be presentable before you show it to prospective buyers. Financial statements must be current and done frequently because every potential acquirer is going to want to see the numbers behind the business.
Not only that, but you want to make sure that all contracts and documents within the business are properly maintained. If you don’t have these documents in place, you may have to get your founding team back together to sign these documents. You want to make the selling process as smooth of a transition for the buyer as possible.
5. Reach Out To Buyers
Many people thought it would be a ‘desperate’ move on my part to reach out to other companies that I thought would be a good fit to acquire us. However, I decided to give that route a shot and that’s exactly how we sold our second company.
We sent out cold emails to companies that were in our niche and crafted a unique pitch to them sharing why we thought they should buy us out. After a few months and lots of long conference calls, we got an official offer. We accepted that offer and within a few short weeks, I had sold my second company in less than 5 years.
7. Make Sure Your Business Is Transferrable
Buyers are going to want everything to continue to run smoothly, even when you are out of the picture. Your systems need to be able to be taught, as well as your standard operating procedures. You also need to make sure that the value of your business will not be lost without you because that will be concerning for potential suitors.
Not only that, but buyers are going to want to ensure that the revenue will be sustainable even when you leave. Do what you need to do to make sure that you can transfer the business over to someone else without having to be involved for too long. I would consult the new owners for no more than 6 months before ensuring that they would be fine on their own.
8. Understand The Timeframe
The time it takes to negotiate these deals is a lot longer than you may think. You have to get your partners, board/investors and everyone else all to agree. You also need to spend the time to go out and talk to the interested parties and put together important documents. From here you need to agree with the interested party, sign a term sheet and then this term sheet gets turned into a contract.
Once you have agreed to the contract (this takes a lot of time), you have to finalize a lot of CP’s (condition precedents). Once all of this is done then the money will finally hit your bank account. Be prepared to spend a few months at the minimum to get this entire process done.
9. Show Continued Growth
A better purchase than a company that will maintain revenue is a company whose revenue will continue to grow quarterly. By giving buyers a growth plan, they will be able to see that the investment in your company is one that will continue to bring something to the larger business, and will add value to the idea of purchasing.
In addition to that, people want to purchase a business that is growing. If a business is stagnant or even on the decline, it isn’t the best time to sell and people aren’t going to want to buy it. Find ways to keep your business growing and sell at those times.
10. Prepare Early
If you are going to want to sell your company, you are going to need a lot of information to present to negotiating buyers. You need to have the idea to sell in mind about a year before you actually go into the selling process.
The earlier you begin to prepare, the less headaches you will have later down the road. The best advice I can give anyone looking to sell their business is to stay extremely organized and to prepare for the process as early as they can.
Conclusion
Whether you plan to build a startup or to sell a company, planning must be a priority in your business. Selling a company is not easy, but if it was built with a solid foundation and has all the right things going on, it won’t be too tough to find a suitor. In this post, I shared with you tips on how I sold 2 companies for a profit in the last 5 years.
