6 Things You Must Know Before Selling Your Business
Selling a business is never an easy or simple process. However, the rewards can be great, and ultimately, life-changing, so if you do decide to sell there are six key things you need to be aware of that will help you prepare and maximize your chances of success. Getting it wrong before you start can ruin any hopes of a sale and can mean many months of your time wasted.
While I specialize in the sale of online businesses and refer to those as examples, these points still apply to business sales whether offline or online. Experienced buyers will see straight through you and the business you are selling and will quickly pass over your offering if they see any red flags.
1. Buyers won’t pay more for potential.
I regularly speak to business owners who believe they have a potential gold mine and expect to command a high selling price based on perceived potential alone. This isn’t how it works. If a business is simply a concept without a proven revenue stream then there isn’t any value in the eyes of the vast majority of potential buyers.
If they were interested in developing their own business from the ground up there are numerous resources to help them get started and they would not be looking to buy something already established in the first place. Buyers want to acquire something that is already successful, not an unproven concept.
2. Buyers are interested in profits, not revenue.
Another common misconception is that buyers are impressed with revenue figures. Sure, they can sound good, but when it comes down to it the only number that matters is the profit a business turns (see last week's column for more on why revenue is a vanity metric). Take a look at these two scenarios:
- Business A: $30,000 monthly revenue, $25,000 monthly expenses, $5,000 monthly profit and $60,000 annual profit.
- Business B: $10,000 monthly revenue, $1,000 monthly expenses, $9,000 monthly profit and $108,000 annual profit.
The monthly revenue for the first site is three times more than the second business, but the actual profit is almost half. Experienced business buyers want to see profit numbers, not revenue.
3. Buyers expect verifiable financial claims.
If you are going to claim revenue from a specific source, you need to have verifiable proof. For example, if you are selling advertising space directly, be prepared to show invoices as well as bank statements that show matching deposits. If you are generating revenue through affiliate offers or third-party ad networks with an online business, be prepared to show deposit records and even access to your accounts online so both parties can see the accounts live. I advise clients to use TeamViewer or Skype as a practical way to verify financial claims on smaller business sales where using an accountant is not always practical or cost-effective.
4. Don't live in the past.
The previous success of a business is largely irrelevant at the time of sale, especially if it has been struggling lately. Buyers are interested in recent performance (usually the last 12 months) and future sustainability and viability, especially if you operate in a dynamic space (such as with websites). I commonly hear sellers talk about how successful their business was in the past after a recent drop and "all it needs is a little work to get back on track".
Unfortunately, buyers don't see it this way. They aren't interested in fixing and recovering your business, especially if you are expecting them to pay a premium. However, don't be afraid to show previous years if the business has been growing steadily. Buyers love to see growing revenue and profit figures, especially if you have already made future plans for the business that seem realistic based on past performance.
5. Honesty is the best policy.
The truth is going to always surface, so be upfront about everything from the beginning. Experienced investors understand that every business is going to have positives and negatives. There is no such thing as a perfect business.
If you are honest and transparent from the start there is less risk of a deal going sour because the buyer uncovered something during due diligence that wasn’t accurate or an instance where the truth was stretched. Honesty is the best policy in all business transactions and selling any business is no different.
6. Expect to answer a lot of questions.
Businesses -- especially those run 100 percent online -- are forever becoming more popular, with so many people looking to become independent and quit their nine-to-five jobs. Consequently, it has lead to a lot of inexperienced buyers inquiring about businesses for sale, which can be a significant time drain, unless you use a broker whose job is to handle questions and vet buyers for you. Selling yourself will lead to a lot of questions -- and you need to be prepared to answer them all, regardless of how simple they may sound.
Never judge a buyer. You never know whom you are dealing with or the buying power they possess. Someone asking what appears to be a simple question could potentially be a buyer that is new to the specific industry and have deep pockets for investing. Experienced buyers will often hammer the seller with questions in an attempt to turn up inconsistencies and red flags.
Do you have experience selling an online or offline business? If you have any other tips or suggestions, share them in the comments section below!