Businesses acquire other businesses for diverse reasons including expanding market share, reducing operational costs, and improving their product/service offerings. According to data from Dealogic, the financial value of mergers and acquisitions involving US-based companies had surpassed the $1 trillion mark by the end of June 2015. Nevertheless, selling a business is often a complex affair, because an entrepreneur must consider several factors before divesting. Overall, there is no particular best time of the year, per say, for selling a business; however, there are best times for selling in terms of optimal conditions, and we’ve provided some vital information on this topic.
Key Factors to Consider When Selling a Business
Before selling a business, you should know how much it is worth. In other words, you should value the business using an acceptable valuation model. For instance, you can use the discounted cash flow model (DCF), which is widely used by Silicon Valley technology startups, investment bankers, equity analysts, and angel investors for valuation purposes. Other popular business valuation models include the multiples method, comparable transactions method, and market valuation. It is important to note that your valuation must be based on up-to-date financial figures and metrics, as well as financial records covering preferably the last 3 to 5 years. If you do not know how valuation works, hire a professional broker with a background in finance and corporate valuation to help you.
2. Growth and Profitability
To attract suitable buyers for your business, you must show that the company is profitable and growing. Figures from Forbes magazine show that businesses that generate more than $3 million in revenues annually generally get better offers than those with lower annual revenues. As such, go through your financials and tweak them to maximize growth and profitability, instead of minimizing these metrics for tax planning purposes as many other owners tend to do. In particular, start maximizing profitability a few years before selling a business. However, do not pad your figures to show growth and profits when the opposite is true, as financially savvy buyers will easily discover these tricks while conducting due diligence. What’s more, there are serious legal ramifications tied to those who are found guilty of engaging in financial impropriety.
3. Corporate Structure
Make sure your business has a solid corporate structure, and is not highly dependent on your presence to continue operating. This is particularly important because most business buyers integrate new acquisitions into existing companies, meaning your business should have a corporate structure that allows seamless folding into another company. Simply put, it should have a well-defined management structure that flows in a top-down manner that is most common in the American corporate industry. Buyers purchase businesses that run well and generate revenue without their direct presence or ‘hands in the cookie jar’.
4. Economic Climate
Focus on selling a business at a time when the economic climate is favorable. This means when consumer confidence is high, interest rates are low, and industry analysts project robust growth in the near future. During such a time, financially strong companies interested in expansion are likely to acquire smaller competitors. Investors are also likely to buy businesses because the prevailing economic climate makes it easy to access financing and recoup their investment.
5. Legal Issues
Before putting up your business for sale, make sure there are no unresolved and pending legal issues, as they are likely to put off potential buyers. This includes legal issues associated with discrimination at work, work related injuries, tax returns, and business ownership. It is highly unlikely investors will shell money to purchase a business that is hobbled by these and similar legal matters.
6. Intellectual Property
Intellectual property (IP) is probably the most important factor to consider when selling a business. In some cases, entrepreneurs acquire businesses with the sole aim of accessing their unique IP. A good example is Google, which bought Motorola Mobility for $12.5 billion in 2011. However, it is worth noting that you can sell your business together with its intellectual property rights or sans IP rights. Your decision should depend on factors such as- the willingness of buyers to match your asking price, and your willingness to sell IP that could be highly lucrative.
Historical Patterns Related To Business Acquisitions in Houston
In Houston, like most other U.S. cities, selling a business takes anywhere from 6 months to 3 years. Be it a small business, or a large corporate firm, location and the type of business industry are also factors that can affect the best time for selling a business. In addition, other factors such as- the target market, industry niche, and goods/services, also play a role in determining the outcome of a business sale. With this in mind, the best time of the year to sell your Houston business is when revenues and profits are high and liabilities are low. You can easily determine this period by evaluating your financial records thoroughly. For instance, you should consider selling an e-commerce business before, or immediately after, the December holiday season, when many consumers tend to make purchases online. For brick-and-mortar outlets, the best time to sell is when foot traffic to your business premises is high, because potential buyers are likely to be impressed by high customer turnout. It is also worth noting that some investors submit acquisition offers after the businesses they have been tracking release their financial reports.
Business Brokers Can Help With Selling A Business
Professional brokers who specialize in selling businesses are generally well-versed in the intricacies of business divesture including valuation, identifying the right/suitable buyer, pre-sale due diligence processes, legal processes related to selling a business, and identifying the right time to sell a business venture. As such, you should look for a reputable Del Lingco business broker to help you sell your business.
When selling a business, entrepreneurs should consider factors such as- growth and profitability, unresolved legal issues, valuation, corporate structure, intellectual property, and economic climate. It is also advisable to sell your business when revenues and profits are at the highest point during a financial year. Since this period varies depending on business niche, industry, and seasonality of goods or services available, it is up to you to identify the right time for selling a business by perusing your financial records.