When, why and how you sell your small business, Sell ​​at the right time

With the recent economic uptick and low interest rates, many small businesses are attracting interest from potential buyers. The BizBuySell Insight Report found that 10,312 small businesses were sold in 2018 - a record for the third year in a row.

Buying a business is one of the best ways for companies to enter a new market or increase their market share. The increased demand from buyers creates an opportunity for entrepreneurs who are ready to move on.

If you intend to sell your small business, consider the following.

Sell ​​at the right time

Timing is one of the most important variables to maximize the return on an investment. Bitcoin trading illustrates this point perfectly. Bitcoin reached its record $ 19,783.21 on December 17, 2017, and is now trading below $ 4,000. People who did not capitalize on the climax will only wish each other.

The same mentality applies to the sale of a business. Recent economic developments have made it a good time for most companies to sell. Now it is at least a good time to think about it.

Although there is no way to determine the right time to sell a business, there are some general pointers when this should not be the case.

1- Do not Sell Your Business If You Still Love What You Do: If you still love your work and feel fulfilled every day, there's no reason to stray from your business. In general, entrepreneurs should try to sell because they want to make a lifestyle or a career change.

2-Do not sell when the market is in a downturn: The value of your business depends on the market in which it operates. Therefore, you should try to sell when the business is good and not bad. It is a restriction not to sell in a city center - the downturn must be temporary. If you expect growth in the future, keep on rest.

3-Do not sell to the wrong person: not all buyers are equal. If you care about the long-term success of your business after the sale, you should do the due diligence for each potential buyer.

Be ready to answer difficult questions

You are invited to explain your reasons and to support your position in a variety of sources, including:

Your Employees: Before you sell your business, you should create an exit strategy that includes an appropriate approach to answering your employees' questions. You should not discuss the sale with your employees until it is completed. However, you need a plan to communicate the sale when it's time.

Your potential buyers: During the buyer's due diligence phase, you should expect many difficult questions about your business. From macro-level issues to your industry and corporate culture to micro-level issues about asset write-offs and long-term debt, there is no plan for the questions a potential buyer might ask.

You yourself: Surprisingly, some of the toughest questions you need to answer will be your own. Entrepreneurs, especially those who have owned the business for many years, often find it difficult to adapt to life after the sale. Be prepared to answer honest questions to yourself, and do not be afraid of self-observation.

Know what your business is worth

One of the biggest mistakes entrepreneurs make when selling their business is that they underestimate or underestimate their business. The value depends on what someone will pay for it. So how can you determine the value of your business?

The best way to determine the true value of your business is to hire an external accountant to conduct a business valuation. A business valuation typically begins with the valuation of the value of your company's current and non-current assets, its income statement and accounts receivable, current and non-current liabilities, and other metrics that reflect the financial health of your business.

The accountant will then use market indicators to determine the long-term profitability of your company and industry and the sale of comparable companies lately. These different factors are weighted and combined to determine the current market value of your business.

Be able to defend your prize

It's important to determine the value of your business, but you can defend that price during negotiations with the prospective buyer. Maintaining clean and accurate financial records improves the validity of your company's valuation. The same financial documents are also the basis of your defense for potential buyers who want to devalue your business.

As with any negotiation, you need concrete evidence to support your claims. While potential buyers can discredit things like market share and goodwill, they can not deal with your financials - which makes your records so important.

The financial documents you want to use to support your review include:

Income statement: Your income statement shows the gross profit, operating expenses (OPEX), cost of sales (COGS) and profits and losses of your business. Potential buyers use the income statement to determine how profitable your business is, and they use a sector multiplier to determine their own valuation.

Cash Flow Statement: Your cash flow statement shows how efficient your business is with its most valuable asset - cash. Potential buyers evaluate your operating, investing, and financing cash flow and how your business manages working capital every month.

Balance sheet: The balance sheet shows prospective buyers an overview of your company's assets, such as equipment, land, inventory and receivables. It also shows your liabilities such as debts, loans or other liabilities. The balance sheet shows the liquidity of a company, and potential buyers can use measures such as the leverage ratio from the balance sheet to assess the risks.

Tax returns from the previous three years: Potential buyers would like a tax return of three years to verify the numbers in your other financial documents. In addition, they want to make sure that they acquire a business that enjoys a good reputation with the IRS.

Discretionary Selling (SDE): The sender's cash flow statement (SDE) is a business valuation method that revises the income statement to show the full earnings potential of your business. The SDE will always withdraw your income statement and add elements such as salary, benefits and depreciation to the owner at its sole discretion.

Leading a successful small business is a challenging but rewarding adventure. Deciding to end this journey by selling your business can be a difficult decision. The process of selling a business is exhausting and difficult, but when all is said and done, you will be richer - figuratively and literally.