How do I know if my business is ready to be sold?

It’s important to note that no business is 100% ready to be sold—-and many businesses’ poor saleability factors can be offset by flexible deal terms. Your business is not the only thing to think about when you’re considering selling; there are also personal and financial reasons you may not be ready to sell your business, even if the company itself is ready to fly off the shelves. 

In this blog, we’re helping you understand if you and your business are ready to be sold by breaking it down into three steps for consideration

1. Consider your personal factors

Before you’re ready to sell your business, you’ll want to ask yourself the following questions:

• Why are you considering selling the business now? Being 100% honest with yourself when considering this important question will determine how successful this process becomes. 
• What are your personal and professional goals post-sale? We don’t recommend the “I’ll figure this out when I have pockets full of cash” approach as this can leave you feeling pretty empty if there aren’t a new set of goals for you to achieve. 
• How does selling your business align with your long-term plans? Again, it’s important to be in a position where you are convinced selling the business is going to help you achieve something big—whether that something big is retiring from the business world, starting a new business you can’t stop thinking about, changing careers, or putting that money to better use another way.
• Are you open to assisting transitioning and integrating the new owner in your business? If not, this will inform the business readiness as you will need to delegate all of your roles post-sale. 

Next, think about your financial reality.

2. Consider your financial factors

When it comes to selling your business, it’s important to reflect on the following questions related to your financial picture:

• What are you currently paying yourself through your business? Make sure to include wages, dividends, expenses being covered that will no longer be, and any other financial benefits.
• What is your current net worth? This includes cash, short term investments, stocks, real estate, vehicles and other personal property, and one other big one: business ownership! The majority of business owners have the majority of their net worth tied up in their business. Is this you?
• How large will your financial portfolio be once the business is sold & what is your desired annual income post-sale? Get clear on what the expected return will be on this portfolio on an annual basis. Does this cover your desired annual income post-sale?
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Once going through the above personal and financial questions, it’s time to move onto some business considerations.

Next, you’ll want to consider your business risk, growth, and documentation factors to assess exit-readiness.

3. Consider your business’ risk, growth, and documentation factors

Risk: 

The level of risk associated with your business is directly linked to how potential buyers evaluate it, and the types of offers you are likely to receive. If buyers perceive your business as high-risk, the pool of potential buyers may be limited, and any offers you receive may include earn-outs or requests for vendor financing. To help you evaluate the level of risk associated with your business, here are some questions to consider:

• How established is your business? When it comes to evaluating the risk of a business, the longer it has been in operation, the more reliable it is considered to be. This means that a business with a consistent 20-year track record is less risky than a new one. Similarly, a business that generates more revenue is seen as more stable.
• Are there barriers to entry? Are you confident that you can defend your current market share? What prevents competitors from replicating your business model? Brand recognition, intellectual property, exclusive agreements with suppliers and customers, and licensing obligations are all examples of protective barriers.
• What’s your level of concentration? If your business is highly concentrated, it may pose a greater risk when it comes to both suppliers and customers. You must consider whether your products are being supplied by a single manufacturer. If you have multiple suppliers, are they all from the same foreign country? Similarly, you must also assess whether any of your customers represent more than 10% of your revenue. If one of your major customers decides to leave you, it could pose a significant risk to your bottom line. This is a common concern among buyers, and high levels of concentration can exacerbate it.
• What is the level of owner reliance? Over-dependence on one person or staff member can be risky. It can make it difficult to sell the business and pose a risk to its stability.
• Are you innovation-proof, or is your product or service one or two innovations away from irrelevance? As an example, are you selling fax machines at a time when email is about to be introduced? How can you ensure your business remains relevant as the market changes?

It’s important to note that no business is 100% ready to be sold—-and many businesses’ poor saleability factors can be offset by flexible deal terms. Here are a few examples:

Growth:

Buyers consider the financial track record or profitability of the business, but past performance isn’t the only thing they consider; buyers are ultimately motivated by the belief that the business has the benefit to generate value and more profit in the future. 

Here are some questions to help you evaluate your business’ growth:

• How are your sales trending? The stronger the sales are trending upwards, the faster a buyer will get a return on their investment, and the lower the perceived risk with the investment. The faster a buyer thinks they will get a return on their investment, the more buyers will be knocking on your door and placing offers.
• How are your margins trending? When it comes to your business, focusing on profits is more important than sales. Consider this: if your sales increase from $1 million to $2 million year-over-year, but your bottom line remains at $200,000, you are working twice as hard for the same earnings. This trend is likely to frighten most potential buyers. Ideally, as your business scales, your profit margins should increase as well.
• What is the future growth potential? How easy and clear are the growth opportunities for the business? Have you started to prove the pathways to growth? The more clarity of your business’ potential for future growth, the more emphasis you can put on future earnings.
• Is growth expensive? Will the company need additional investment to realize growth opportunities with their current resources?

Documentation: 

The more you have documented, the easier it is for a future buyer to step in—and the easier it is for a new buyer to step in, the more potential buyers you’ll find. Plus, you’ll be more likely to sell it at a higher price. 

Attention to detail can encourage confidence and ensure your business will not only survive, but thrive. Here are some questions to help you evaluate your business’ documentation:

• Are your customers secured with contracts? Step one is to establish contracts with vendors, manufacturers, contractors, or employees. Step two is to ensure the contractual language is with the business, not the owner.
• Are your financial reports reliable and available? It’s important to have a bookkeeper who uses reliable software to prepare monthly reports. Additionally, having accountant-prepared year-end statements is necessary to provide potential buyers with confidence in the legitimacy of the business. Tip: More often than not, banks require review engagement financials rather than the base-level notice to reader version. They are a step up in dependability and cost, but the return on investment is proven. 
• Do you have Standard Operating Procedures (SOP’s)? If any daily, weekly, or monthly tasks are committed to memory, they should be documented. Wouldn’t it be reassuring to purchase a business with well-documented major tasks?
• Are your filings up to date? After accepting an offer to purchase your business, the buyer will be given a certain period of time to perform due diligence on the business. During this period, the buyer may request any relevant documents, such as credit card statements, merchant reports, and worksafe filings. Having all these documents readily available before listing the business is crucial to ensuring a successful deal.
• How is success measured? What metrics are most important to you as the current owner? Summarizing these to help buyers understand the business from your unique point of view really helps. 

While this may seem like a lot of information, the reality is that selling a business is a big task; it’s why entrepreneurs who have successfully sold a business won’t stop bragging about it!

Before you get overwhelmed, know that we’re here to help you navigate this process. If you’re interested in learning about how ready your business, we’re happy to offer a free initial valuation, which covers the three main areas: personal, financial, and business.

Get in touch to begin your sales journey—we can’t wait to help.