As a business owner, you will at some point likely make the decision to sell your business. Whether you have owned the business for many years or only a few years, you will probably wonder if it is a good time to sell your business. People sell businesses for various reasons, some of which are retirement, health, disputes, burnout, stress, trading up, relocation, and financial hardship. There is one thing to remember that is always true. The best time to sell a business is when it is profitable and growing.
To prove the value of your business, you must have good, accurate financial statements. It is typical to show income statements and tax returns for the past three years. That shows a constant level of income, a growth each year, or a decline. The business will be worth more if the financials show growth. If you have not shown all of your income in order to pay less taxes, the business will be worth less, as the cash flow will be less. If possible, it would then be best to keep the business for a couple of years and show all of your income. There are expenses you can add back to your bottom line, giving you a larger cash flow and a higher selling price. They are personal expenses, one-time expenses, and expenses not necessary for the operation of the business. Your business broker will explain all of these to you and add them back on your cash flow statement. It is important to remember you must be able to prove all add backs, and a provable set of books is a top priority to a buyer.
Is your inventory up to date? Your inventory turnover will vary depending on the type of business, but inventory is usually expected to turn over in one year. The worst example I have is sad. I did an evaluation of a very large business with a huge inventory. After completing the evaluation, I determined the value of the business was in the millions but the inventory was worth much more. I explained to the owner, who had started the business and successfully operated it with a great profit for many years, that he needed to sell off a huge amount of inventory before he listed the business for sale. There is no way any buyer would be able to justify purchasing the business with millions of more dollars in inventory than the business was worth. He explained to me that people went to his store from many miles away, as they could always find what they needed. He understood why I could not list the business but was unwilling to sell off any inventory. I later learned he finally let his nephew take over the business, with an agreement to make payments to him until he paid in full. This was an opportunity anyone would seem to appreciate. The nephew sold the inventory and never paid him for the business, eventually closing it. All of those years as an extremely successful businessman left him nothing for his retirement. Make sure your inventory is manageable and require a large down payment when selling.
It is also important to make sure all of your equipment is in good working condition. If you have equipment that has not been used for a long period of time, remove it and have everything in the business current. Spend a little time cleaning and organizing to make your business look inviting.
Think of ways your business could grow and be able to share that information with a potential buyer, as a buyer will be thinking of expansion opportunities to increase profit. A business must make enough to pay debt service and also a living wage to the owner. A business broker can evaluate your business and help you determine a fair asking price. Putting yourself in the position of your buyer will place some reality in a fair asking price. Would you have enough profit to service your debt and pay yourself a living wage if you were buying your business?
As stated earlier, the best time to sell a business is when it is profitable and growing. If you are ready to sell or think you will be in a few years, a business broker can guide you with the proper steps to take to prepare for the sale.
