balance sheet

If you can’t answer these 3 questions, you’re not ready to sell your business

balance sheetThe process of selling a business is complex and multifaceted: It involves working with multiple stakeholders who sometimes have conflicting priorities. While only you can decide when to sell your business, you also must rely on these other stakeholders in order to have a successful sale. It’s your job to make sure their decisions align with your own goals.

Why sell your business?

Every business owner will have to consider a transition at some point in their career, whether that’s upon entering retirement, starting a new business, or even reentering the workforce as an employee. Even if your gut feeling is telling you not to sell your business yet, you might find yourself in circumstances that leave you with few better options. On the other hand, you might be looking for the chance to sell and suddenly sense the timing is right. Regardless, you have to consider a number of factors other than your intuition. You can’t go with your gut unless you’ve also prepared well for a business sale. 

In many sales, an owner will already have a specific buyer in mind, and both sides might want the sale to occur — but weeks, months, or even years pass, and nothing happens.

When a would-be seller never takes the time to learn the specifics of how a prospective buyer actually views the company, they don’t know how to move the sale forward. The perceived complexity of the sale becomes a barrier to action, and for a business owner who isn’t 100 percent certain that they want to or should sell their company, that’s more than enough reason to let a deal fizzle out.

Your gut feeling might be telling you to pursue or avoid a sale, but is your gut feeling always right? Take a step back and think objectively about what you want to do. Here are three questions to ask before selling your business.

1. Is the company financially healthy enough to yield a suitable valuation?

The value of your business will be at least partially determined by company cash flow. If you’ve decided that you need US$20 million to retire, but your current cash flow doesn’t warrant that price tag, it could make sense to wait until business picks up before pursuing a deal.

Many of the variables you’d consider when valuing your business—monthly or annual sales numbers, profit margins, market cap and total addressable market estimates, plus others—are the same ones you already use to measure your company’s financial health. If you think you should (and can) improve in certain areas or you believe your most profitable quarters are just ahead, postpone the sale until you have more leverage to work with.

There’s one caveat to that, though: Postponing a sale is not a strategy with long-term viability.

2. Do you understand the buyer’s key decision drivers?

Ideally, when you’re ready to sell your business, someone will be ready to buy it. Before they do, however, they’ll want to see relevant company financials, customer data, market summaries, and other important information. All of this information matters, but you should try to ascertain the factors that matter most to a particular buyer. This will help you home in on areas that need improvement and prevent you from optimizing the wrong aspects of your business prior to sale.

3. Do you know what is most important to you in a sale?

As you consider whether you’re ready to sell your business, think about what matters most to you. Is it maximizing your financial return, leaving a legacy, or something else? Will your employees’ opinions impact your decision? Do you hope to remain involved with the business in some capacity? Identify the outcomes that would be nice to have as well as the ones that are nonnegotiable, and use those to set a baseline for success.

A business sale can feel like a marathon. If you’re going to finish it successfully, you need to train for it — that means everything from understanding your financials to building relationships with potential buyers. If you can answer what questions to ask yourself, then you’ll be better equipped to get the outcome you’re looking for.

Nick McLean is a founder and partner of Four Pillars Investors, an investment company that purchases and operates middle-market businesses that have an untapped potential for growth.

For more insights and inspiration from today’s leading entrepreneurs, check out EO on Inc. and more articles from the EO blog



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