Have you ever asked yourself, “Is now a good time to sell my business?"
That may seem like a crazy question in 2020. We are in this unique COVID-induced economic environment, the unemployment rate remains distressingly high, many firms are working from home through the end of the year and there is an election looming.
Despite all of these uncertainties, it is a serious question. And the answer (which may not be obvious) is a definite “maybe”.
Is Now the Right Time to Sell My Business?
Many factors determine whether it is a good time to sell a business. Some are “big picture” considerations, including the overall health of the economy, conditions in the capital markets, tax policies (and potential changes to them).
Other factors have a narrower focus, such as whether other businesses in the industry have been sold recently, the company’s financial status and growth prospects, and current shareholders and their priorities. All are important, but even in “normal” times they are rarely all perfectly aligned.
So, even if today does not seem like the best time to sell, it is always the right time to prepare for a sale – you never know when opportunity may come knocking at your door.
Even after the COVID-19 pandemic is largely behind us, a number of industries face an uncertain road to recovery, and the future is likely to bring a “new normal” rather than taking us “back to normal” in many or even most sectors of the economy.
That is not necessarily bad.
Some will benefit greatly – for example:
- Work from home and online schooling created a boom in home improvement projects and a huge demand for everything from fixtures and hardware to web cams and furniture, and so on.
- Tech solutions that help manufacturers to manage new supply chains and support a decentralized workforce are needed.
- The U.S. and other western countries are seeking to become less dependent on developing countries to manufacture pharmaceuticals and other essential items.
The overall message is that there may be new, unanticipated ways that your business could become an important part of a larger entity’s strategy that may not have existed pre-COVID.
Why Prepare Now to Sell My Business?
The key to success is: prepare to prepare (not a typo) for an exit.
Who hasn’t walked through an “Open House” admiring (enviously) how the rooms are so uncluttered, with everything in place? Of course, the owners spend months organizing and cleaning up, making minor repairs they had put off for years, even attacking the mess in the garage before putting up the “For Sale” sign. Without that cleanup, the offers from buyers would be far lower than what the owners could otherwise attract. The same applies to selling your business.
Business owners are reluctant to admit this publicly, but we have heard the following many times in private: “I have no idea how to even start thinking about getting my business in a position where it would be attractive to buyers. I’m not ready to pull the trigger now, but I know I need to start getting myself educated.”
The first thing to know is that this is not something to be done over a couple of months, after you have decided, “I’m ready.” Even if you are not sure you want to sell, going through the preparation process can be extremely educational and beneficial now and down the road.
Note that it is a misconception to think that a business has to be growing, with strong profit margins, to be an attractive acquisition candidate. It certainly helps, but even if performance has been stagnant there are many things a business owner can do now to improve how the company looks, before actively seeking a buyer. Houses with blemishes still sell, and for a good price, as long as the owners make sure everything is in order despite the fact that there are some issues a buyer would want to address.
10 Steps to Prepare to Sell My Business
For a downloadable PDF to print and share, see here:
To attract a good buyer and get a good valuation when you are ready to sell, here are 10 things business owners need to do long before they are actively pursuing an exit. And, since you never know when an attractive offer could be waiting in the wings, or when life will change in a way that makes you re-think your plans, “long before” really means “now”.
Step 1. Keep reliable, timely, and consistent financial statements and tax returns.
Without this, you don’t really know how your business is doing, or what it might be worth. You need at least three years of comparable financials to show trends in sales, expenses, profitability and cash flow. If your financials show the business has not been doing as well as you think it should, now is the time to figure out why, and try to make improvements before inviting any potential buyers to peek under the hood.
Step 2: Make sure your books, records and contracts are in order.
A successful due diligence process depends on having all these things well organized and readily available – scrambling to pull it all together quickly will not serve you well. Would-be buyers will back away, or low-ball an offer if the information they need is missing or is too messy to sort through. It can take longer than you think to identify what you have and what holes you need to fill. Even if you have no intention of selling your business in the next six to 12 months, you will benefit from being organized. Many business owners put this off—it is simply not as much fun as pursuing new sales or developing new products. If you cannot bring yourself to focus on it, get help.
Step 3: Review your insurance policies.
This may sound easy, but potential buyers know that in some industries, getting the right insurance at an affordable price can be a challenge. Know the key terms of your policies, and take a little time to research trends in insurance coverage for your type of business. Many sophisticated buyers conclude that entrepreneurial businesses are under-insured.
Step 4: Know your KPIs, and back them up with good data.
You know your business better than anyone else, but buyers today want a clear understanding of what drives your performance and the data supporting them. What are your customer acquisition costs? What factors drive sales and profitability? How do you determine inventory levels? Managing by the seat-of-the-pants is not a strategy. If you cannot address these issues, a good CFO should be able to help.
Step 5: Know your market.
Can you quickly list the key trends in your market? This can cover a wide range of topics, including customer preferences, new technologies, top competitors and why previous competitors exited the business, challenges in hiring and retaining employees, and so on.
Step 6: Clearly articulate your value proposition to your customers.
Think of this as an elevator pitch. In 25 words or less, what does your business provide that keeps your customers loyal? That might be outstanding service, customizable products, reliability, unique expertise – whatever it is, you need to identify it and be able to articulate it clearly.
Step 7: Deal with the skeletons in your closet (avoid “gotchas” and closing table re-negotiating).
Maybe sales declined because you lost a key customer, or a top salesperson left, or supplier issues created problems with inventory, or there are unresolved HR issues (a discrimination lawsuit?). Whatever the issues, do not try to sweep them under the rug – face them head on.
Step 8: Resolve and minimize internal disputes.
If there is dissent among your management team or key staffers about strategies or priorities for allocating resources, you need to address that before initiating a sales process. Figure out a way to present a united front and a consistent message to potential buyers.
Step 9: Have realistic expectations.
Business owners talk about multiples that other companies in the industry received when they were sold, but those multiples are just distractions (and maybe a little hyperbole). Each situation is unique. A trusted expert who looks out for your best interest can help you to understand what you can realistically expect from selling your business, or what you could do to improve your position if a range of valuations falls below your minimum requirements.
Step 10: Communicate wisely.
It can be isolating if you, as the owner, are considering selling the business but do not want to involve your senior management team yet, because you are concerned some might be less than supportive or even leave. It is best to work with a limited number of highly trusted individuals in the pre-preparation stage. Hiring an outside entity that can provide both expertise and absolute confidentiality can be the best strategy.
If your business is growing and profitable, it could be a very good time to sell. Prospective buyers with access to capital are looking for bolt-on acquisition candidates to accelerate growth, and a deal could be structured to allow you to participate in the future upside. If your business is facing challenges and you do not feel sufficiently energized to tackle them yourself, a buyer with the right expertise could be your best move in today’s environment. If you are ready to do something new or retire, that means the right time is now. Regardless of your situation, the best outcomes go to companies that are best prepared for a sale process, and that takes advance planning.
G-Squared has guided business owners through hundreds of transactions and we have seen most of the challenges that can arise throughout the process, from the early stages of preparation to final closing. If you would like to learn more about our sale readiness program, please contact us. We look forward to hearing from you.