THE BLOG
11/25/2016 03:21 pm ET Updated Dec 06, 2017

5 Vital Things to Bear in Mind Before You Sell Your Business

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One of the most challenging endeavors one might embark on is selling a business. However, knowing what to do as well as how to go about selling your business will definitely put the odds in your favor.

The sale of your business might be your exit strategy or wealth building plan. Whatever reason it is, selling a business can be an emotional issue which you have got to prepare for adequately.

When you decide to sell your business, there are things you have to be aware of. They will go a long way in preparing you for the process and help you do it right. I recently had a one on one interview with TejPrakash, Co-founder and Co-CEO of Should I Sign Inc. In the course of the interview, he shared some tips on how to maximize the chances of success in selling a business.

This article is based on five of the issues we discussed.

1. Be Fully Aware of Your Business's value

One of the reasons most participants don't get a deal in the popular show, Shark Tank , have to do with wrong business valuation. Trying to sell your business without having adequate knowledge of its real value could negatively impact the success of such transaction.

The first, and probably the most important step to figure out in your bid to successfully sell your business is to determine what buyers are really looking for. What are the buyer's considerations when seeking for a business to buy?

Majorly, there are three methods to assess a business's value:

• Income Approach:
Simply, this is the present net value of the business's income stream.

• Asset Approach:
The sum of all the assets and liabilities of the business.

• Market Approach:
This approach involves analyzing other similar companies and determining their selling price.

Most people go with whichever of these methods gives the best and highest valuation. Although, these approaches give a rough idea of the value of your business, bear it in mind that they only serve as a guide. There are many other factors that could play into the final value of your business.

2. Profit Matters to Your Buyers, Not Revenue

Most people believe that buyers are impressed with revenue. This is not the case with most buyers. Although revenue sounds lovely, a buyer is usually more interested in the profit.

Consider these two business scenarios.

Business A
$60,000 monthly revenue, $55,000 monthly expenses, and $60,000 annual profit.

Business B
$30,000 monthly revenue, $20,000 monthly expenses, and $120,000 annual profit.

While the monthly revenue for the first business is twice the second business, the real profit is only half. Thus, the size of the profit matters more to experienced buyers than the total revenue.

3. Don't live in the Past

When it comes to selling your business, the past success is grossly irrelevant. Past success even becomes more irrelevant if your business has been struggling of late. Buyers are more interested in the current performance, most especially the last 12 months.

Besides, the future sustainability as well as viability also matters. Most sellers often bombard their buyers with news of how successful their business was in times past, and emphasizing that all they require is a little effort to get it back on track.

As interesting and promising as the above sounds, buyers are not seeing it your way. Fixing and recovering your business is not their headache especially if they are expected to pay a premium.

However, if the business has been making substantial steady growth over the years, be proud to show it. More often than not, growing revenue and profit figure attract buyers. This is particularly helpful if future plans for the business has been made, based on realistic past performance. Having future plans ready makes it easy for the buyers to see how revenue and profit will grow upon the sale.

I believe this is what happened with the acquisition of J. D. Byrider by Altamont Capital Partners in 2011. Within the two years of the acquisition this buy here pay here dealerships company was able to add 33 more locations to their operations.

Selling your business can be in the best interest of the business, however, it is important to have a comprehensive future plans at hand during the sale.

4. Prepare to answer a lot of Questions.

Unless you employ the services of a broker that will handle questions and vet your buyers, trying to sell yourself will lead to a lot of questions. So, it is important to be adequately prepared for whatever question might come your way.

Before any buyer will sign any independent contractor agreement with you, expect to be scrutinized. Expect buyers to know the history of the business, the size, the valuation and many other details. But one question that always comes up which you should adequately prepare for is why.

Why are you selling your business?

How you answer this might break or make a deal. However, this question is an opportunity to pitch the appeal and value of your business. Be aware of why exactly you are selling and be able to communicate your reasons. Whatever your reason, providing a motivating angle is necessary to sustain the buyer's interest.

5. Buyers will not pay more for potentials

More often than not, some business owners believe they have a potential gold mine and expect to command a huge selling price. This kind of thinking assumes that price is based on perceived potential only. This makes sense if you are buying loose diamonds for its potential, not when you are selling a business.

A business needs to have a proven revenue stream before it can be of any value to a potential buyer. Business owners should note that if prospective buyers are interested in building a business from the scratch, there are numerous resources that can be used. Buyers are interested in something successful both in theory and practice not just a concept waiting to be proved.