November 14, 2014
There are many reasons to sell your business.
Because it’s going downhill isn’t the best one – not if you want to recoup the value of your hard work.
Businesses have a life cycle, much like people and other living things. The length of each stage is dependent on many variables – the owners, the industry and the general economy – but they all go through a similar progression.
Start-up – Start-up is the very early life of a business, often defined as younger than two years. At this point, the entrepreneurs are key to the success of the enterprise, since it is their brainchild.
Growth – The business has its legs and is actively growing revenues, customer base and goodwill. Competition might heat up, and business needs may outstrip cash availability. But prospects are positive.
Maturity – The business has reached its maximum peak of performance regarding sales and profits and is well-established in the community. Some are in the enviable position of being so-called cash cows – minimal effort is needed to keep the profits flowing.
This is a critical point for business owners, although often not recognized as such. Often, they will coast for a few years until the inevitable occurs.
Decline – The business is beginning to lose its market position, sales are dropping, and competition is hastening its demise. The reinvestment and energy present early in the life cycle are obviously absent.
This is when many business owners choose to sell. They treat the business like an old car with a lot of miles on it – they’ve used it up.
Unfortunately this is a very unattractive proposition for potential buyers. Eroding sales and profits (and reported losses) decimate an important aspect of business value – goodwill.
Goodwill is the perceived worth of your business above tangible assets, dependent upon reputation and ability to generate revenue.
That’s a hard case to make when your company is suffering from a terminal illness.
Another problem is that sellers and buyers look at the same business through different lenses. The owners see the years of hard work and investment of time and money. They want to recoup that. But buyers see only a business in need of energy and capital to reverse the decline.
The best time to sell – if your goal is to maximize your investment – is the growth or mature stage.
If you are faced with decline, you have the choice to reinvigorate the business with fresh ideas and energy. This way, you can reset the clock back to company health.
A business should show three solid years of financial performance if you plan to sell. That requires a level of pragmatism many business owners lack because they have an emotional attachment to the business.
However, planning an exit years in advance gives you the greatest control over maintaining value and boosting return on investment. Staged exits might work if you’re not quite ready to give over the reins entirely. Shared ownership can be a win-win – the business gets the new blood it needs to be reinvigorated while you continue to share in profits.
The size and structure of your business affects how easy it will be to sell and the amount you’re likely to realize.
The smaller the business, the more dependent it is upon the strengths and talents of the business owner. Even in those enterprises with pricey assets – an inn for instance – the owner’s personality and relationships are key to success. Many businesses struggle after transition of ownership because of this factor.
Sometimes new owners change things customers love, or they aren’t skilled at creating their own strong connections in the community.
Investors in general regard small businesses as more risky. So, in many cases, the most likely candidate for purchase is another owner operator. This is another case when a staged exit makes sense.
With your endorsement, your customers are more likely to accept and continue doing business with your successor. Many medical or veterinary practices are sold this way, with the senior member staying on for a few years.
Other tips to improve the value of your small business include diversifying the customer base, getting operations in tip-top order and training key employees. You want to present your company as an endeavor that will continue to operate smoothly when you step out.
This article was originally posted on November 14, 2014 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at firstname.lastname@example.org.