In life, timing can be everything. The difference between success and failure.
For this brief overview of business sale timing, let’s simplify the issue into three broad areas, namely:
- Your personal needs
- Your financial needs
- A realistic business valuation
The secret is effective harmonization of these three factors.
1. Personal needs
This is a fundamental consideration. It requires a business owner to look inside themselves to make an honest appraisal of their true personal situation. And it’s not just about the dollars and cents (of which more later).
How does the owner really feel about detaching him or herself from their "baby" now? (or at all). If it’s been an adult lifetime of endeavour, breaking this attachment can often be particularly difficult. Common thoughts are:
- "Who could possibly run the business better than me?"
- "Who is going to protect my legacy?"
Some will not see it as a problem because they’ll just look for the next challenge. A new business to start, build and sell.
In a sense the answer for all business sellers lies in a new challenge of some sort in conjunction with an honest appraisal of "Wheel of Life" type issues. To get at the root of these feelings and emotions. It’s here that personal growth frameworks like the Enneagram, which identifies the underlying drivers for nine different personality types, can help access this inner guidance.
The labels on the "Wheel of Life" may vary but the categories typically encompass: family, romance, friendships, environment, relaxation, work, finances, health, personal growth, community.
This is not the place to go into detail but suffice it to say that the aim is to strike the right balance, whatever this may mean for the individual business owner. Who knows, it may even lead to voluntary work in the community?
The real trap for a small business to avoid is reaching "burn-out" and feeling the imminent need to sell, for self-preservation reasons, even if the timing isn’t right. This can be the consequence of a lack of forethought. And it’s much more likely to lead to a disappointing sale price (see point 3 below).
This reinforces the important issue of addressing business exit objectives before starting to trade. That’s an early consideration of succession planning and sale value. Perhaps to groom a successor, or build up the business in a way that adds to its attractiveness at sale time. It enables due consideration as to whether succession by a family member is a realistic option for them, and for you.
Overall, planning ahead buys time and allows for regular monitoring of the business situation so that necessary changes can be made to increase the likelihood of achieving the original objectives.
The same applies where co-owners and Directors are involved. Here maintaining clear and honest communication is essential to avoid future disputes that could lead to serious adverse consequences for the business and the collective and individual rewards accruing from ownership.
- What is Your Motivation for Selling
- How Long Does it Take to Sell a Business
- A Step-by-Step Guide to Selling a Business
2. Financial Needs
Everyone’s financial position and circumstances are different. And so are people’s aspirations.
Whilst having financial security in life is more of a priority for some than for others, it’s always a consideration. Even if the objective is a life of adventure and travel it still needs to be paid for. And there (probably) also needs to be a place to come home to!
Needs and priorities change as we get older. The Wheel of Life helps to establish these priorities going forward. It’s good to write down specific goals, prioritized actions and timescales against each of the criteria. This can be thought of as a "rest of life plan" that encompasses personal need, and those of family and significant others. This makes it easier to estimate financial requirements and in turn how much contribution the business sale needs to make towards the total amount.
This can be a complicated area so it’s good to use the services of a professional Financial Advisor to help develop a robust financial plan to meet individual needs.
3. Business Valuation
It’s extremely common for a business owner to believe their business is worth far more than it really is. After all it’s their "baby" so why wouldn’t they!
Business sale brokers, who deal with business sales every day, frequently report a lack of realism in owner’s asking prices.
It’s a broker’s job to understand the realities of demand and supply, both at an overall market, and specific business level. They are motivated to give realistic pricing guidance. A business that doesn’t sell typically means a broker making significant effort for little or no reward.
What helps with business sale pricing is for the business owner to separate out those things that can be influenced from the things that are of concern, but cannot be influenced.
Take a look at ExitAdviser's Business Valuation Tool
There are many areas where a small business owner has very little influence.
Like external factors relating to the overall market demand and supply and its relative current and future attractiveness compared to other sectors. Like competition, and the trends and drivers of change in the market leading to profitable new niches, and declining old ones. Only rarely does a small business have a product or service in high demand that only they, or a limited number of others, can supply at high profit.
The key is to take advantage of these emerging trends, ideally before others spot them. This normally requires significant preparation, serving to emphasize the earlier point about a longer term view and ongoing monitoring of the situation.
So when a business sale is imminent it’s necessary to concentrate on those areas of concern that can also be influenced. Like optimizing short term business performance, and then presenting the business in its best light to potential buyers, so that it stands out from other competitive offers.
Simple practical measures include an analysis of customers to identify and prioritize those that make profit, and discouraging those that don’t, perhaps by raising prices to them.
To summarize, the central point is to consider the timing of a business sale holistically. To harmonize key personal, financial and realistic business value considerations. Through doing this personal and emotional needs are explicitly identified, so that they can be evaluated against financial realities. If the realistic asking price for the business is insufficient, and there's a significant shortfall, adjustments will be necessary.
This could mean revising personal needs, or putting back timing of the sale so that longer term change measures can be introduced to enhance business value. It may also make sense to wait until the overall business sale market recovers.