This is for the business owners who read this blog.
You think back to your younger days. You remember the long hours. Yourself struggling to become “ramen profitable”. Those were the hard yards.
But now, you’re a proud owner of an established business. It’s been chugging along nicely for years now, lining your pockets with cash every month. Perhaps now you’re less involved in the business, and you have the time to hit a round of golf every day if you wanted to.
Maybe you love the cut and thrust of being “in the field” and you’re still handling day to day operations – filling orders, attending to customer requests etc.
But there comes a time when every owner asks themselves..
What’s the right time to sell my business?
This question is inevitable.
Maybe because you’re getting on in years with no successor in sight.
Maybe your business requires too much of your time and you’d rather be sipping margaritas on the beach.
Maybe you’ve heard of people selling their businesses and becoming cash millionaires overnight, and you’d like to be one too.
If you’ve never thought about this before, then this article will go through some situations where you’d want to sell your business soon. Have a read through and identify which one you are!
Situation 1: When you need the funds
Sometimes, you’re asset rich but cash poor. That means that a lot of your net worth is tied up in your assets – your business, your house etc. So when financial emergencies come knocking, you’re out of pocket.
It’s times like these that you’ll need cash quickly. Liquidating your assets can be a great way to get a lump sum right away.
However, you can expect many downsides of selling your business in this situation.
Firstly, it might not even be possible. The larger your business is, the longer it’ll take to sell.
But why does it take so long?
You’d have to search for buyers. Then they’d take time to do their due diligence on your company. Then they’d have to secure financing. You’ll need legal and financial teams to advise and draw up the necessary documents.
Just have a look at this infographic from BCMS that talks about what you need to do just to be ready for a sale:
All up, it could take months before a deal closes. In a financial emergency, you might not have that time. Worse, you’d probably not want to be tied up with the sales process at such a critical time – it’ll be physically and emotionally draining.
Secondly, you’ll probably have to let it go at a discount. For an urgent sale, you’ll likely have to drop your asking price to entice buyers. If your financial situation comes to light, you can expect buyers to use that to their advantage. They can bully you with delays and a long due diligence process. They might get you to make concessions like taking payment in equity of the their company instead of cash.
Thankfully, selling for cash isn’t the only way to unlock cash from your business. If you have strong financials, you could always borrow money against your business. There are many advantages to this:
- You’ll receive a lump sum of payment
- You get to decide how much you’re taking out
- You don’t lose control of your business
- It’s quicker to turn around than a business sale
That said, I understand that there is a psychological barrier that people have. They don’t want to feel indebted, or worry about struggling to make the monthly repayments. That’s why I’d only recommend this route if you already have an established business, with predictable cash flow!
There is one other way you could raise quick money without waiting for the sales process – options. Offer an interested buyer the exclusive right to buy your business. They’ll have to pay for the right, whether they end up going through with the transaction or not. Buyers do this because they need time to make a decision, but don’t want to risk losing the opportunity to someone else.
Often, it’s a much quicker transaction. You’ll also get cash in the tens of thousands. However, you’ll have to face the risk that your business will end up getting sold. So I’d recommend this to people who are very sure that they want to sell their business.
Situation 2: When you want to diversify your net worth
Often, people think of their investment portfolio as being their holdings of stocks and bonds. In fact, large assets like your house and business should be considered part of your portfolio as well!
If you’re a successful business owner, then your business will probably take up a large proportion of your net worth. This can be extremely risky because if your business tanks, there goes your net worth along with it.
Speak to any financial advisor and they’d tell you the same thing: you need to diversify!
So how do you do that?
There are a few options:
- Obviously, you could sell your entire business and reinvest the funds into other asset classes. The downside to this is that you cannot benefit from the financial performance of your business going forward.
- You could sell part of your business. That means, you sell some equity in the business to another investor. This can reduce your exposure to your business. If you’d like to retain control of the business, then it’s advisable to only sell a minority stake.
- You could borrow against your equity in the business, like we discussed in the previous section.
The best time to undertake this would probably be when you have dependents and can’t risk losing a lot of your net worth. The older you get, the more important diversifying becomes to protect your nest egg!
Situation 3: You don’t have confidence in your business
Sometimes you just lose hope in your business. Maybe you’re not sure what the future of your industry holds. Maybe you’re not able to grow the business, and every day is a grind. Maybe you’re just tired.
All these are legitimate reasons to want to get out of your business.
Now you might be wondering: “how can I sell something that I don’t have confidence in?”
The important thing to remember is that your business has value. Whether you’re struggling or not. It has value.
What kind of things would a buyer consider valuable in your business? Here are some ideas:
- Groundwork that you’ve set in place – a team, infrastructure, SOPs, marketing channels, prospect list.
- Existing customers and revenue – even if it seems unprofitable for you, another business might have a similar business that would benefit from having some of your customers. Yes, they’d pay to capture these customers too.
- You’ve got a complementary product – you could have a good product, but no customers. A business with a ready pool of buyers might be interested in acquiring your business for your product. It might be a better deal than to create a product from scratch. Your product might also have some brand recognition in the market.
There are countless synergies and reasons why another company would like to buy a struggling business. So never write your’s off! It could be far more worthwhile for you to look for a buyer than shuttering your doors.
Selling your business is often a good exit strategy. It’s important for you to realise that at some point, you’re going to want to sell. We’ve shown just a few instances where you might choose to sell. But there are many more.
The takeaway is this – if you’re going to sell eventually, then you need to make your business sellable. That means that you have the systems and teams in place for the new owner to come in and take over. If your business is largely dependent on your own efforts, or your reputation, then it’s bad news. These aren’t things a new owner can take over.
Have you ever sold a business? Or do you own a business – if so, how are you preparing it for the eventual exit? Share with us in the comments below!