Hopefully, this article will help you decide why and when you can sell your business under better conditions
When a vague business idea gradually begins to crystallize into a real startup project, the thoughts of eventually selling it may be the last thing on your mind. However, defining an exit strategy at the earliest stages has a few benefits. Firstly, it would be easier to set short-term and long-term goals.
Secondly, your exit plan will hint at which legal structure is the best, what types of revenue models you should adopt, and how to better develop your business. Moreover, it will give your potential investors some clarity on the timeline and likely rate of return on their investment.
Reasons to sell the business
Most startups go through rough times at some point. At such times, many entrepreneurs ponder giving up. Selling the business to a bigger company is one of the healthy ways out. On the other hand, selling a struggling startup is not the only possible solution and not always the best one. A lot of businesses sold are perfectly viable and profitable.
Puzzling, right? The decision is always individual. Nevertheless, there are plenty of substantial arguments that generally indicate you should sell your business.
Your business is a failure
Perhaps, you overestimated the demand for the products or services your company offers. Maybe, the competition in the chosen field is too strong or you haven’t invested enough in innovations and customer service. Anyway, if you keep losing money on a regular basis and there’s no viable strategy to improve the situation, selling it might be a good idea. However, if you still have a chance of stabilizing the business, do it before the ultimate sale. It will bring you more favorable deal terms.
Your business has reached the peak of its profitability
Many people wonder why someone sells a profitable business. After all, it’s like giving away the goose that lays golden eggs. However, every small business reaches the point when the profits stop growing, and the company enters a stagnation phase. It remains stable, but expanding operations would require more than the company owners could ever give. If such a business is acquired by a larger company, it would be a valuable asset. If it doesn’t, it may not thrive in a fast-changing economy. Hence, many profitable companies are sold to become a part of a larger ecosystem.
You’re not into it
Many entrepreneurs start new business projects out of boredom, or unwillingness to perform an office job 9 to 5. Hence, at the initial stages of their startup journey, they feel excited and full of enthusiasm. However, managing a business may also become a routine. If you don’t feel like a business person anymore or wish to explore different industries, you should sell your business to someone who’s excited to make it grow.
It causes too much stress
The operational indicators of your business activities are not the only factors to consider. Your mental and physical health is also at stake. According to a study by Michael Freeman, entrepreneurs suffer mental illness at higher than average rates. They are 2-10 times more inclined to depression, ADHD, bipolar disorder, and substance abuse. If your mental or physical condition significantly worsens, you may consider relieving yourself from the daily business stresses.
You have a few businesses
Running several successful companies may be exciting and profitable. Yet, there are times when focusing on a single business becomes more rewarding. For instance, you clearly see brilliant opportunities for one of the business projects. At the same time, you are unable to fulfill the goals as your budget is too thin to support adequate growth across all companies. In that case, resources should no longer be wasted on operations with ill-defined goals. Selling the least promising business may give a strong boost to your main project.
Selling at the right time
The pandemic has caused many business disruptions and forced even more selling decisions. However, the statistics of acquisitions are disappointing. According to BizBuySell Insight Report, the number of small businesses sold in 2020 dropped 22% compared to 2019. This was the largest year-over-year drop since the Great Recession of 2009 when transactions dropped 28%. Certain dynamics prevailed in the character of finalized deals.
While the number of transactions decreased, the median cash flow of sold businesses grew 10.7% over 2019 to $135,567, while revenue increased 8.2% to $613,341. The impressive financials illustrate the spiking demand for pandemic-resistant businesses, while weaker companies stay out in the cold. Until global economies stabilize, owners of those businesses too close to failure should not expect to sell their companies profitably. Moreover, those companies with modest financials may not lure potential buyers at all.
Another thing is that selling a business needs perfect timing and appropriate conditions. Planning in advance is always a good idea. For instance, if you want your business to merge or be acquired by a larger corporation in the nearer future, you should try to become a leader in your specific niche before the planned sale. You will need some time to bring orders to your financial and legal affairs. When you find the right buyer, the legitimacy and value of the company will be scrutinized. Discussing the exit plans with current investors, shareholders, executives, and advisors is also important. This way, everyone is on the same page and no misunderstanding occurs when the actual sale happens.
If you’re not desperate to sell right away, you have more chances to do it wisely. Having some time to negotiate puts you in a stronger position. Ideally, you should have at least 2-3 offers to choose from before making a deal. Implied offers also count. However, don’t make too many assumptions based on your own ideas. Discuss a potential sale with the people that may be interested. Get their feedback. Be ready to improve some business details accordingly before putting your business on the market.
Finding the right buyer for your enterprise takes a while. You should consider both internal (family members, employees, partners) and external buyers. It would be very helpful if the buyer’s vision of the company’s future is similar to yours. In that case, the transition would be smoother.
On average, selling a small business requires over 6 months. Sometimes, though, it may take even a couple of years. The bigger the company, the bigger the stakes are. Moreover, some types of businesses are popular among a wide circle of buyers, while others are too specific and will attract only those already involved in your industry. Hence, finding a strategic buyer for your business should start early. Sometimes, even before you formalize your venture, especially, if an exit is your ultimate goal. Even if it isn’t and you’re selling the company because of an unexpected failure, don’t wait too long to fix it. Remember that selling a business is a lengthy process and you need to keep the company afloat before it changes owner.
You can also check our latest blog post on What is a business plan and how to write it?