Selling your business is a first for most business owners.  It is difficult to know exactly how to approach the process and especially to know what the value of the business is.  Selling a business is exciting but it can also be tough from several perspectives.  Let’s face it – It’s Personal.  Most owners have spent countless hours working in the business and building it up and have a very unique attachment to the business.  It is often difficult to look at selling the business, giving up control, and contemplating a move to the next thing.

It is hard to separate the value an owner, and many times founder of a business sees in the business and what a prospective buyer is willing to pay.  As the old adage goes “a business is only worth what someone is willing to pay for it”.  With this in mind this is the first of two articles looking at how you can gain proper perspective as you prepare to sell your business.  Many times it is helpful to put yourself in the buyers shoes and look at your business as you would if you were going to buy it.  To do this let’s look at some of the steps you might take or some questions you might ask as a prospective buyer and see how this can help as you look to sell your business.  After we have explored each question from the buyers perspective we will look at how this can help you as a seller.

As a Buyer:  What kind of business Do you want?

Your first step as a potential buyer would be to determine what type of business you want to buy.  Depending on what business you are in currently or what your area of expertise is will guide you on the types of businesses you want to look at.  Are you buying to expand into a new market, to pick up a new product line, to build additional customer base, to create economies of scale or efficiencies.  Is there technology or systems that you could implement from the prospective business instead of having to create the systems or processes yourself?  Will your investment be to simply remove a competitor, or are you looking at the purchase strictly as a financial investment for a return on your money.

To Sell: Think of your business from this perspective.  It is easy sometimes to get bogged down in the daily ordeal of running the business and not look at how valuable your business could be to the right kind of buyer.  Think of who would have the most to gain in purchasing your business, how you would find that buyer, and be prepared to elaborate on how your business would be a strategic win for them.  Typically your business will be worth more to someone that will potentially gain a strategic advantage or create synergy by buying your business than it will be to someone that is strictly looking at a return on a cash investment.  Be open minded.  Sometimes there are pieces of your business that may be very valuable to a potential buyer and other pieces that are not as valuable.  Does it make more sense to sell the business in pieces or keep it all together.  Do you have particular systems, processes or technology that would work in a different type of industry which would open up more potential types of buyers?

As a Buyer:  How will you Value the business?

What formula would you use to determine a price you are willing to pay for a business?  You would usually start by looking at what you are buying.  There are physical assets like equipment, vehicles,  inventory, real estate, etc. which can be valued by yourself or experts in the field.  There are also intellectual assets where the value or price is more subjective.  These can be things like how well does the company compete and how well known are they in their industry?  The value of the workforce, how stable the workforce has been, the culture in the company, the ability of the management team to deliver consistently.  Loyalty of the customers and, potentially long term contracts with customers.  The value of a good name and reputation in the market, documented processes for consistency and profitability.  What differentiates the company and what makes them successful, their “Secret Sauce”.  Any intellectual property in ways of doing business, patents, unique operations, recipes etc.  These would all have some level of value to you as you assess how you can make money with the purchase of the business.

To Sell: Think about your business from this perspective.  “Clean the House”.  How can you document everything possible to help the prospective buyer understand the potential future possibilities of the business.  Just as you would look at the different parts of the business you wanted to buy, look at your business and clean up the things that would be red flags or concerns for you as a potential buyer and work through how you can answer the tough questions that may be asked about different areas of your business.  Are there things you could implement into your business now that would help add value when you are looking to sell the business?  Is your management team self sufficient?  If not, are there ways you can help improve the company management structure that would make your company more appealing to a potential buyer?  Are there ways of doing business with your customers that need to change to be more appealing to a potential buyer and does it make sense to implement any of these changes now?

Conclusion:

Two of the most important issues to consider when looking to sell  your business are who are the potential buyers and how will they put a value on the business.  Identifying the types of buyers that would be the most interested in and potentially have the most to gain in buying your business is critical and many times can be better understood by looking at your business from the outside in.  Understanding how the value of your business will be determined can make all the difference in knowing how to get the best price when you sell it.  Again looking from outside in at what you would be willing to pay for your business if you were going to buy it can give you the right perspective on what you can do, and potentially what changes you could make to get maximum value out of your business when you sell it.  In the second part of this article we will look at the unknowns and financing issues in selling your business.  (Link to second article)

If you are interested contact me and I will provide you with a Free list of items buyers may ask about to help you in your exit planning process.