If you come to the conclusion that selling the business is the only viable option for you, then you must take the necessary measures to ensure a profitable sale. An entrepreneurial-process developed business should earn 8 percent to 30 percent in profits, depending on the industry.
Unfortunately, your options become limited by keeping a business as an investment after you no longer wish to work. Have you analyzed your current situation, both personally and professionally, and come to the conclusion that selling is really your best option? There are many valid reasons that would warrant the selling of a business over keeping it as an investment. Some of these include age related illnesses, not being able to find trustworthy people to run your business and the nature of your business.
Some steps that you can take to maximize your asking price and making sure that it is justifiable include, but are certainly not limited to, the following:
• Assessing the current financial situation of the business and ensure that stability is certain.
• Analyzing, documenting and implementing processes that maximize productivity and minimize costs – thus achieving the best rate of return.
• Process mapping of current business processes.
Taking the steps listed in this book will help your business become more than a string of mediocre transactions – it’ll be a true success story!
Buying or Selling a Business as an Investment
The only reason to buy a business is for future net profits and cash flow. But valuations of a business can differ widely. The real test of value is in the ability of the business to pay for itself through earnings and cash flow. The ROI (return on investment) of a small business should be somewhere between 20 and 35 percent depending on the risk involved.
If you’re planning on selling your business, your exit strategy must achieve the following:
- Prove that future excess earnings will achieve a 20 to 30 percent ROI.
- Develop a cash flow plan to prove forecasted cash is a reality and if not what needs to be done to get it on-plan.
- Income and Balance sheet statements must be accurate and timely to prove profits can be expected to continue.
- If the financial records can show an increasing profit picture the value will increase.
- The returns must verify the business financial statements.
- Prove that the employees are in place with job descriptions and organizational charts.
- Employee contracts
- Complete listing of assets, applications in the business and condition.
- Listing of all mortgages, rates payable and other liabilities
- Sales brochures, advertisements and marketing materials.
- One-year business and marketing plan.
- Service and product specification sheets.
- Guarantees, warranties that could be liabilities in the future.
- Any patents, trademarks, copyrights.
- Corporate charter, by-laws
- Stock option plans, profit sharing and pension plans and retirement plans
- List of shareholders, how shares are held, value to each person.
- Agreements that restrict transfer of shares.
- Insurance policies.
- Written employment policies and practices.
- Union contracts or collective bargaining agreements.
- Meet with the bank to discuss credit worthiness and credit limits.
- Meet with the employees to discuss their perspective on how things are going
- Meet with key vendors for outstanding payables and history.
- Meet with major customers for history and future business plans
- Check with law enforcement for any charges or convictions against the business, or any officer or key employee charges.
These are only some of the due diligence elements required. When it comes time to getting serious about buying or selling a business, Holt Marketing & Management Services, Inc. has developed a comprehensive checklist (check out our website for details.)
No matter if you’re selling or buying a business, you’ll need this vital information in order to make a decision and make money.
The Best Time to Sell
Deciding to sell is a tough decision. If business is good, you may ask yourself why sell now? But if your health begins to fail, or business is bad the decision to sell is a bit easier.
To make a successful sale you must get the best price while the business is still doing well, and not try to sell your business in a downturn. When you sell, you eliminate risk and you can convert your equity into cash. Cash will enable you to pursue other opportunities, either business or personal.
Only 25 percent of all businesses that are for sale actually sell. The reasons for this are variable, but can be attributed to lack of due diligence.