How to sell a small business?

With the retirement of the baby boomer generation over the next decade it's predicted that hundreds of thousands of businesses will be up for sale. There are three reasons why you would want to sell a business The first one is because you've got into trouble and the business is now fighting for its survival. We're losing customers, we're losing employees and the buyer looking at this business is going to perceive great risks and so therefore the value is disappearing out of the business quickly. The second reason is that someone comes and makes us an attractive offer for the business and we're not ready and we're going well. We think if it is this a good offer, is this a good price, what do we do now and often if we don't react quickly enough that offer will go away. The third reason which is probably only 20% of all of them is that we've decided to sell and can take time to sell the business. Obviously the last one is the best to go through as we go through the process and plan an exit, what should we be doing, what are the key factors.

 

First and foremost, we need to put yourself in the shoes of the buyer. If we can figure out who the best buyers are, it’s time to mould the business to a buyer as it makes it easier and more comfortable for the buyer to acquire. It's the buyer that's got to exploit the potential of the business. When you sell a business you’re gone, most of the time the sellers completely sell out of the business and whatever they’ve done in the business that's history. So when we sell a business we sell the future of the business we never sell the past. Now we ask ourselves, how do we create a great future for this business that the best buyer will execute on, what sort of businesses are they looking for and are there different types of potential. There's always different potential buyers because our business may represent different value components to different buyers. One buyer might want the employees another buyer might want the intellectual property another buyer might want the location another buyer might want the customers. That becomes hard now for the seller but I as the buyer would be looking for how to generate new value. I want to return to my shareholder’s value so I need to what's the highest probable return I can make out of this business. What we're saying it's not about being incredibly profitable, it's about creating value for a buyer exactly because it may not be the our profits that the buyer would be interested in. We may not have executed on the potential in the business, we may have lost our motivation, we may have lost our energy, we may not have the skills or the funding to fully exploit the value in the business. So what we're looking for is for a buyer that how the buyer is going to extract value from this business and that's what we've got to do. We've got to collect evidence to give to the buyer. This is the way in which this business could be exploited.

 

Now moving to getting quality advisors. how are we supposed to do that and what the pitfalls?

Most professional advisors are so locked into some 1970s paradigm for EBIT multiple, the conventional way of valuing a business. The EBIT multiple or conventional valuation methods are backwards. They look at the history of the business and they look at the profit in the business, look at the historical growth in the business and they project that forward. But if we’re not going to be in the business it's not new any longer. It's the buyer so it's very important to find an advisor who understands it's about creating value for the buyer. We have to remember very few people have sold a business once let alone more than once. So We've never been in the room negotiating the deal we don't understand. We need someone whom we know and trust and have been there lots and lots of times and has created really great exit value for their sellers.

 

The concept of what creates value for the buyer is the same even for a part-time innovator small shop small professional. It's about what does the business look like going forward. How reliable are those projections of revenue and income and then what are the risks in the business? So we know we are asking someone to take over our business and effectively buy a job in some cases. So how reliable is that job going to be and obviously the greater the risks the lower the value, but that many of these businesses are about personal relationships and personal clients and personal knowledge. That's going to walk out of the business so when that walks out of business there goes out the value along with us. There are various factors which needs to be considered before selling the business such as documenting our knowledge, helping in transitioning the business, having a succession plan for employees, how does the business needs to be transferred to the owner and then we need to consider as to how does the owner reliably move the business forward so that he is getting a good income out of it. we at Kapso Business Services, India’s Leading Business Brokers provide business owners what they need and guide them through the entire process. If you want to buy a business to acquire certain resources for expansion or sell a business to pursue other opportunities, we provide you, the client with what you need and guide you through the entire process.