How to decide if it’s the right time to sell a business
This is a question I asked all the time and I think it is one of the most important questions a business owner must navigate. How to decide if it’s the right time to sell a business.
Here are my observations from talking to business owners who ask that question.
Its better to sell your business than close the doors.
This is something I see happen all the time. The owner wants to sell their business, thinking it will take time; which it does, but thinking it will sell eventually.
The reality is that only about 25% of businesses ever sell. The remaining 75% simply close their doors.
Only about 25% of businesses ever sell.
Please; read that again. Only about 25% of businesses ever sell.
The reasons that only about 25% of businesses sell includes the following:
- There are no buyers for that business in that industry at that point in time because the laws in that industry are constantly changing, for example, a doctor with a medical practice and the constant changes to the Affordable Care Act.
- The Great Financial Recession was real, and it hurt industries. For example, the construction industry was badly hurt by the Great Financial Recession which meant the workers in the industry left and pursued other jobs as they had to feed and take care of their family. As a result, there is currently a skills shortage in that industry and not many buyers that want to own and operate a construction business. Buyers are also in short supply in that industry as they need a contractor’s license and they need a good credit score and downpayment to qualify for a loan to buy a business.
- The owner of the business is the leader, cheerleader, decision maker and most important of all, risk taker or risk manager. As they are human, life happens. A serious health issue, divorce, burnout, getting older and therefore less willing to work those 60 and 70-hour weeks which it took to be successful.
- Change that comes from new technology or competition effect all businesses daily. For example, if you are in retail, think Amazon and its changes. If you are in the manufacturing industry, think new technologies which means capital investments which means financing those changes. If you are in the transportation industry think new pollution emission standards. We’ve already mentioned the medical and construction industries. Change is the new normal and its happening faster than before.
It’s not about you when you are selling your business, but rather about the right time to sell a business.
Selling a business is a huge step for a business owner. Absolutely. A business owner that wants to sell however, is only half of the transaction. The other half is a motivated buyer that wants to navigate the many difficult and frustrating steps to buy a business. The list of things that are difficult and complicated for a buyer are long and include:
- Navigating with a spouse or loved one the idea of taking such a big and personally risky step for the family is acceptable.
- Applying for a loan to buy the business and not knowing their chances of success to get a loan approved.
- The seller providing an accurate set of financial statements.
- Finding a business that meets their often quite specific criteria including price, location, number of employees and more.
One of the biggest concerns to a business buyer that most business sellers don’t understand is that a buyer wants to know the business has potential and lots of it.
If the business sales are flat or declining, that scares most buyers away as they aren’t sure why the business isn’t growing. What feeds a buyers concern, if the business has flat or declining sales is whether the sales for the business are at the bottom of the sales cycle or does it have further to go down. If a buyer becomes unsure, most business buyers will simply walk away as they have no interest in buying the business to find out if they were right or wrong.
A business valuation requires your tax returns for the business for the last 3 years, a current Profit and Loss statement and a recent Balance Sheet.
If it comes with you having questions, please give me a call on (916) 570-2674 or send me an email to email@example.com so I can answer those questions for you.