Ep 284: 11 Things to Know Before Selling Your Business

Sometimes you may own a business for 20, 30, 40 years, but there is always a goal to sell your business or to transition to maybe making the next business. Here are 11 things to know before selling your business.

Don’t Tell Anyone

This is just important. Don’t tell anyone that you’re going to sell your business. You could lose employees, vendors, contractors who work for you. Your competitors are going to tell your clients. There’s just nothing to be gained. Keep your mouth shut. Do not tell anyone. Try to provide all the information that may be needed to the potential buyers without letting anybody know so the only person that may know maybe is your accountant.

Get a Valuation

you need to find out what a realistic price is, what is the business worth. You need to get a value from somebody other than you to tell you what it is worth a business broker. Let’s find out what that price is because maybe there are a few things that you can do to find tune things to maybe bring the value up.

Understand the Terms of the Sale

Understand the terms of the sale when you’re selling it. Do you only want a cash offer? Somebody could just write you a check for a certain amount of money. If you’re willing to finance it, you’ll probably get a lot more money.

So you need to understand what you’re able to do in regards to the terms of the sale. Would you be fine doing some in-house financing over 10 years? Would you want to lump some to get a lump sum? 25% and then finance the rest? Understand where there’s some flexibility.

Buyers Want Profits, Not Potential

You do not sell a business based on the potential it has. It’s not like real estate where you’re selling a house in an up and coming market.

Your financials are going to lead this sale. It’s profits, profits, profits. So understand that going in.

Buyers Want Profits, Not Potential

Next is you need to have verification and proof of value. This is your financials, current bank statements, tax returns, etc. They’re going to want to see cash flow, things of that nature, and all the documents that would verify the financial state of the company. You need to get that ready because anybody buying a company is going to want that.

The Last Three Years Matter the Most

It’s not what you did 10 years ago, eight years ago. Most people want the most current snapshot of your business. They want to see the trend. That’s the critical thing. Buyers want to see a positive trend. They don’t want to buy something while it’s going down, while it’s on the decline, so when you think you’re going to sell your business, this is where the last three years matter the most. Build up those last three years. You need to get the trend in a positive direction.

Capital in the Form of Inventory or Equipment

What do you have in inventory or capital equipment? This creates value. Equipment holds value pretty well. These are going to be the things that also build up the sale price. How new is your equipment? Have you made any great capital expenses recently that would bring value to the sale?

Real Estate

You can sell a business in two different ways. You can sell the business and then you can hold on to the real estate for passive income. That’s what I would do. I would probably not sell my business along with the real estate underneath of it. I think real estate is not required for the business to operate, sometimes. They could go separately, but it’s not uncommon for the owner to keep the real estate and just sell the business, but the two may be together.

There may be a massively different price between the two. You can sell the real-estate for potential. If it’s trending up in that market, real estate will absolutely change the numbers dramatically and change the sale dramatically.

Only if the price is right, I would consider selling the real estate as well.

Know Your Client Base and Their Buying Habits

You don’t know who’s going to buy you. A competitor may buy you. Well, a competitor’s view of buying you is different…

A lot of different people may buy you. People that buy businesses, buy it as an investment. There’s companies that do nothing but buy businesses. Berkshire Hathaway, just for an example. They buy it, lock stock and barrel because they believe it’s a company they can make money operating. They typically buy it because they don’t want the risk.

They buy an established business because the risk parts that take place in the first two years are done. It’s got some momentum now. It’s got a system as a place to be successful. You don’t have the same risk when you buy an established company. You have removed a lot of risks. Somebody who’s a little bit older might want to not do their job anymore, just wants to kinda oversee something that they view they could do a little less time-intensive work to keep going.

I bought businesses before why I wanted their client base, and that’s why I’m talking about the client base and the buying habits of the client base. How often do the customers come back and buy? What does their average purchase look like?

A competitor can improve its customer base by buying one through the purchase of another company.

Have Systems In Place

Have manuals and systems in place that the business operates on. This is the processes and information that keep the business running. You’re not trying to reinvent the wheel, okay? So if you’re looking to sell your business, tighten up your systems, and create manuals.

Have a Team in Place

They’re going to want to know how the turnover is going to be and who do you think will stay. Who are the critical pieces in this puzzle to make it run? They’re all absolutely critical.