Who, when and why to sell your business

Eugenie Jones Asset Protection, Business Strategy & Planning

On the face of it, the who, when and why of selling a business seems pretty obvious. The logic goes something like “I want to sell my business to the person with the deepest pocket, and I want it sold now”, or put another way “I want cash now”. However, scratch the surface and there can be more to it than (just) money.

This article will cover:

  • How much of your business you should sell
  • Who you should sell it to
  • When you should sell it
  • When you should start trying to sell

How much you should sell

This is a question of whether you sell 100% now, or sell a part now and the rest later. In short, it’s a double-edged sword.

Sell it all, and you can feel isolated from the business which you spent years building. You’ll also need to find something else to do with your time (more difficult than it sounds), and need to work out what you’ll do for cash for the rest of your life (will you be able to survive comfortably from the sale of your business?).

Sell a part of it, and you’re suddenly accountable to a third party. If you’re a sole business owner, tensions between shareholders isn’t a problem, but introduce a new business owner and tensions can arise and things can become difficult (quickly). On the flip side though, you’ve now got someone to share running the business with.

If you sell part of your business now, it can also limit your sale options later on down the track (the key is to have a strong shareholders agreement with “tag” and “drag” clauses – let us know if you’d like more info). We’ve seen situations where a minor shareholder has prevented an outright trade sale to a competitor. Strong documentation is the key in avoiding these situations.

So, to come back to the question, how much should you sell? The answer depends on what’s right for you in terms of:

  1. Who you’re selling to (for example is it a partial sale to a staff member, or a outright takeover by a competitor)
  2. Whether a partial sale will limit your options later (for example do you turn off future buyers if another person in your market owns part of your business)
  3. Your head-space and whether you can deal with/be bothered with an external shareholder.

Who you should sell to

Who you sell to will determine how much they pay for your business. Some people are better placed than others to stump up with cash.

In our experience, the following generally pay the most for businesses (in order of most to least):

  1. IPO or sharemarket listing (the rarest form of sale, and in general exceptionally unlikely…)
  2. Sale to a listed company (will a big player want to take you out?)
  3. Private equity or venture capital (can someone make more from your business than you?)
  4. Trade sale (to a competitor, supplier or customer)
  5. Internal management buy out (a sale to senior staff)
  6. Employee share plan through a Performance Trust (getting staff to buy shares through future profit)
  7. Partial sale (is there someone who only has enough cash to buy some of you, or doesn’t want all the risk on their own)
  8. Other existing shareholders

Who you sell to has a big impact on how much you get. Existing shareholders know the bad aspects of your business, so push price down. Employees don’t generally have enough capital to purchase. A trade sale is more profitable, but is harder to get across the line.

It comes down to who you’re dealing with, how much cash they’ve got, and how risk-adverse they are.

Question: Who do you know in each of the categories above that could (hypothetically) buy your business?

When you should sell

Now that you’ve identified who you’re selling to, timing becomes the name of the game.

Sell at a peak in your business, and you’ll do quite nicely. Sell just before the peak and you’ll do even better. Sell in the trough and, well, you won’t quite do as well.

Without getting too technical, a business’s growth tends to follow the sigmoid curve. On inception of a new idea, things slip backwards, before peaking and tailing into a decline. The trick in business is to have another change coming, just before you slip into a decline, which keeps on pushing the growth up:

Ideally, you’d sell the business just before the peak, with a clear pathway forward being laid out for the new buyer. You want to paint them a picture of the things they can do to drive growth. You want them to feel assured that they won’t lose customers and can keep the profit levels up.

When you should start trying to sell

The question of when you should start trying to sell your business depends on how “sale ready” your business is. It also depends on where your business is on the Business Fundamentals Growth Curve  (click here to read more).

If you need to build value in your business, then sale could be 3 years away. If you’re in a position where you want to sell your business, then you’re 8 months or so late.

In our experience, from the day someone says “I want to sell” to the cash hitting the bank, it on average takes 8 months. That assumes you can find a buyer, answer the due diligence questions, and are able to get the cash you want.

For businesses who are looking for some direction on how to grow or sell, the first step is catching up with us for a no obligation 90-minute business discovery session. This session will highlight some of the aspects of a business that might need some attention to help sell it.