Preparing to sell your business? Here are 4 things to think about first

Building a business from the ground up takes years of hard work and sacrifice. So, when you start thinking about selling up, it’s naturally going to be a very emotional time.

Although the practical elements are important, the emotional side of this life-changing transition is often just as difficult to manage. That’s why you need to make sure that you plan accordingly before you put the business up for sale, so you are ready to move on when the time comes.

Ultimately, you need to leave the business in a strong position so it can continue to thrive without you.

If you are preparing to sell your business, here are four things to think about first.

1. Determine your price

When you put the business up for sale and offers start coming in, you may have a hard time deciding whether to accept or not. After all, how do you put a price on something you spent so long building?

There are several ways to value a business including the price-to-earnings ratio, often referred to as multiples of profit. If a company is making a regular profit, the most recent figures are multiplied by a certain number of years – this number is the price-to-earnings ratio.

For example, if a company has a price-to-earnings ratio of four and it makes £500,000 post-tax profits, it may be valued at £2 million.

The price-to-earnings ratio is often determined by the growth potential. So, high-growth startups like tech companies may have a higher ratio than an established business with steady profits.

As well as the price-to-earnings ratio, several other factors may be considered, including:

  • Business assets
  • Entry cost – how much it would cost to set up a similar business
  • Discounted cash flow – the predicted value of future cash flow today.

However, you should only use these factors as a guide because there are many intangible elements of a business that are difficult to value. That’s why you may also want to consider your financial aims after you leave the business when deciding on a price.

You may plan to retire, in which case, think about the lifestyle you want to lead. If you can achieve everything you want in retirement with £1 million, is there any need to potentially delay your retirement for years and hold out for an offer of £1.5 million?

Similarly, if you want to start a new business venture or return to work, determine how much you need to cover your living expenses until your new venture starts generating income. Factor in other financial goals like increasing retirement contributions or clearing debts too.

Provided you can meet your financial goals after the sale, then you may want to entertain the offer.

2. Make your business sale-ready

Any sensible buyer will do their research before making an offer, and you need to be ready for their questions.

With the right preparation, you can make the business more attractive to buyers and ensure that it is able to run successfully without you. But there are many aspects to consider, so give yourself as much time as possible to prepare.

If you can, pay off debts and increase cash flow so the business is in a strong financial position when you are ready to sell. Get the paperwork in order too, so you can address any concerns that a potential buyer may have. Transparency is vital during a sale, and it may put buyers off if you don’t have clear financial records.

Additionally, you may want to assess the day-to-day operations of the business because you need to be confident that the company is in good hands. Before you sell, take the opportunity to look at the organisational structure and make sure you have managers that you trust and a succession plan in place.

3. Choose the right buyer

Your business is part of your legacy and you may want it to continue growing, even if you are no longer at the helm. Now that the business is sale-ready and you are confident that the day-to-day operations will run smoothly, you need to find the right person to steer the ship.

When you are choosing a buyer for the business, start by considering what you want your future role in the company to look like. You may want to sell up and leave the business behind, but you may also want to have some involvement, perhaps in an advisory role. If this is the case, whoever buys the business needs to be happy with this arrangement.

Next, consider the different types of buyer, and which of them suits your vision for the business.

  • Financial buyers will buy the business as an investment but may not have an interest in running the company.
  • Operator buyers will buy the business with intention of running it themselves.
  • Strategic buyers will buy the business to expand their own operations, often by absorbing your business.

If you choose an operator buyer, you may want to discuss your ideas about the direction of the company and find somebody with a similar approach to business. You may also have some say in who runs the business if you choose a financial buyer but bear in mind that it is ultimately their decision.

Whether you opt for a strategic buyer, an operator buyer, or a financial buyer, consider their overall values and find somebody who shares your vision for the future of the business.

4. Prepare for the emotional toll

Selling your business is not just a financial transaction, it is a drastic life change. A huge amount of your energy went into building and maintaining the company and it is likely a major part of your life. So, leaving it behind can take a big emotional toll on you.

It is important that you give as much time to preparing for the emotional turmoil as you do the practical elements of the sale. Before you do anything, think carefully about your decision and make sure that now is definitely the right time to sell.

If you are sure that you want to go ahead, it could be beneficial to speak to friends and family about any anxiety or regret you feel during the process.

Remember, you are not the only person experiencing the transition either. Your employees may be having difficulty too, and speaking with them can help you both feel more confident about the change.

Focusing on the new opportunities that await you in the future can also help you see the transition in a more positive way. Although the change can be daunting, selling your business is the beginning of an exciting new chapter in your life.

Get in touch

If you need guidance about your financial plans once you have sold your business, we are here to help.

Email or call 01905 419890.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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