Should I Sell My Business? Consider The Following Reasons First

Should I sell my business is often not an easy question to answer. Inside this guide we break down reasons why you may or may not want to sell.

Should I Sell My Business? Consider The Following Reasons First

Whether or not you should sell your business is a very personal question. Some people build companies with the expressed intent of selling them. Others stumble into entrepreneurship and spend decades building a business they never consider selling until it comes time to start thinking about retirement. Whatever brought you to this guide, we’re going to outline all the things you might want to consider if you’re thinking of trying to sell your business.

Is it Better to Sell or Close a Business?

If you have customers and you’re generating revenue, you’ve done work that someone else may want to buy instead of starting a similar business from scratch.

If you’re burnt out or just ready for something new, instead of closing your doors, it’s worth considering if you can sell what you’ve created to someone looking to skip the startup phase. Even if your business is struggling, you may still have options to sell. If you have inventory, equipment, and/or customers, you’re further along than someone who is starting from scratch, and that is worth something.

I recently met with a small business owner that bought his father’s company. His dad was ready to retire, and assumed he’d just slowly wind the business down. It was doing roughly $100k in annual revenue. When the son took over, he quickly expanded product lines and doubled their revenue in twelve months. 8 years later, it’s a multi-million dollar company. Where his dad saw a slow end to the business, he saw immense opportunity. Many buyers will be the same.

Baton believes every business owner deserves to know what their business is worth — so they made it free. Baton evaluates hundreds of comparable businesses, taking location, industry and other factors into consideration, and compare the results of a variety of valuation methods (eg. discounted cash flow, cash flow multiples, revenue multiples, EBIDTA multiples, and more). They use a  proprietary algorithm that weights these values to produce an estimated valuation range that gives owners a realistic view of what the business may be worth if sold today. Along with your valuation range, they’ll provide actionable advice on how to prepare your business for a sale and maximize your chances of selling on the higher end of the range, along with personalized connections to our vetted partners.

So regardless of why you’re considering a sale, you can get a free valuation, discuss what some of your options might look like, and help get you access to valuable data.

How do I Know if I Should Sell My Business?

People generally sell businesses for three reasons. Sometimes, a mix of the following reasons inspire a sale, but it’s important to understand your motivation so you can have realistic expectations for what the sales process could look like.

  1. You’re ready to do something else - whether that’s retiring or working on another project, the sale of the business will give you the time and/or the money you need to move on.  
  2. You want money - sometimes market conditions show that NOW is the time to sell. Maybe you see an inherent risk in your business, and you want to mitigate that by selling. Or, sometimes a buyer comes out of the woodwork and makes you an offer you can’t help but consider.
  3. The business isn’t producing enough profit - running a small business is hard work! And sometimes, it may feel like you’re just not selling enough - but that doesn’t mean your business is worthless. There are plenty of buyers out there who may want to acquire your company and change things around in the hopes of turning it into a more profitable venture.

Evaluate Your Company's Performance and Future

If selling is primarily motivated by financial reasons, it’s important to consider whether or not selling your business is a better option than continuing to grow it. Generally businesses are sold for a 1-5x multiple of cash flow. A buyer will evaluate how much profit the business generates, and they’ll buy it under the assumption that it will continue to generate similar or greater profits.

I pay myself a decent salary from my business, but I have made substantially more on a yearly basis working for other people. I am however continuing to grow the value of my company, and my long term goal is to either eventually sell it and use the money for something else, or to allow the business to pay me more. Regardless, selling now doesn’t represent the best economic opportunity for me as an owner, and I’m young and enjoy the work I’m doing.

Most business owners live off either a salary from their business or a salary and profits from the business. If you sell your business, you’ll no longer have that income. A large cash windfall from a business sale can sound great, but it’s important to consider what you’ll do with that money in the absence of that ongoing income.

Personally, selling my business wouldn’t net me enough money today to do anything more interesting than what I’m already doing. Thus, I’m growing my company until either my interest shifts or there’s so much value there in a sale it’s hard to ignore.

Many business sellers are simply looking to retire. Work with your financial advisor to understand if the proceeds from a sale combined with any existing retirement funds you may have will provide you with enough money to live the way you want to live.

Selling At a High Point

Sometimes it is simply the best time to sell. If you were running a business selling PPE (personal protective equipment) when COVID rocked the world, your business would have increased dramatically over the next twelve months. If you had the foresight to consider that maybe the whole world may not be wearing masks as much as they did, selling at that time might have generated the best potential exit for your business.

Every industry is cyclical - and large strategic buyers and private equity firms often become fascinated with particular industries. When that happens, the multiples they are willing to pay for a business can become highly competitive. If you find yourself in an industry where you feel like now is a particularly great time to sell based on market conditions, it’s worth considering how you can mitigate the risk of your business eventually being worth less than it is right now by selling.

When performing your free valuation, Baton looks at what other businesses in your industry are selling for. So if you’re unsure if now is a great time in your industry to sell, Baton can give you a better idea.

If you feel like selling now might not generate the highest price, getting a valuation from Baton can show you ways you can increase the value of your business – in fact, this is why Baton was born.

Things like expanding your customer base, hiring more skilled managers, and removing yourself from the day-to-day operations can increase the value of your business to potential buyers. So if you’re not ready to sell right now, but you’re considering it as a future option, there are steps you can take over the next several years to get to a better price.

Changes, Timing and Managing Risks

Sometimes, life just changes and as a result, maybe running your business no longer makes sense. Perhaps your family is growing, and you want to spend more time with your kids. Maybe a new opportunity came your way that you feel is more worthy of your time than the business you’ve been running.

I’ve talked to many small business owners who build great companies when they’re young, and as they get older, the demands of the business no longer align with the lifestyle they want to live. Selling for them becomes a great option.

Your business may also have inherent risks. Many people build ecommerce companies that are largely reliant on Amazon as a distribution channel. Over the last several years, these companies have become increasingly valuable to both individuals and private equity firms consolidating them. But some believe there is inherent risk in building a business on top of amazon - if Amazon changes their algorithm, or if they decide to make an Amazon-branded product, sales could shrink overnight. As a result, some sellers perceive this risk early and decide they are better off selling instead of trying to grow their business outside of Amazon.

An additional risk in business is potential litigation - from customers, employees, and vendors. Some business owners often consider selling when a lawsuit is pending. Keep in mind that you will need to both disclose any pending litigation with a potential buyer during the due diligence process, and as part of a purchase agreement, you will generally be held personally responsible for any undisclosed litigation.

Money and Retirement

Selling your business can have all sorts of tax and financial implications you may have never considered. It’s best to work with a CPA prior to closing to understand how the sale will impact your taxes and your personal financials. Depending on the size of your business, you may generate enough wealth from the sale to leave something behind, so if you’ve never considered succession planning, it’s worth talking about what you’ll do with your wealth after you pass on.

Similarly, if you decide that selling your business isn’t right for you, coming up with a succession plan for your company is still a smart and worthwhile endeavor. Many small business owners don’t take the time to consider what will happen to their company when they’re gone, leaving heirs and employees with a legal and financial mess to sort through that can ultimately result in needing to sell a business your family might otherwise want to continue operating in your absence.

Is the Value of My Business Increasing or Decreasing?

Over the last several years, the world has changed dramatically. Along with it, so have most businesses. Employee costs have gone up, recruiting is more challenging than ever before, and inflation is raising costs in almost every sector. For some companies, this has been a windfall, allowing them to grow at unprecedented rates. That can often be a great time to sell. Most buyers want to buy businesses that are expanding rather than contracting. For other companies, the pressures of the last few years may have created new risks and challenges that could be mitigated by a sale of the business.

Whatever is happening to your business or in your industry, it’s important to understand if you’re increasing or decreasing the value of your business. The simplest way to understand that is to look at your net income - is it increasing month over month and year over year, or is it contracting?

If your profits are growing, the value of your business likely is along with it. If you’re experiencing a slump, a savvy buyer will likely recognize that when reviewing your financials.

You can use Baton to track your valuation over time, understand how buyers will consider these changes, and gain insight into things you can do to increase your valuation as you prepare to sell.

Evaluate Your Personal Goals

Holding or selling your business should be primarily motivated by your personal goals. These are both intrinsic and financial. If you love what you do every day, and if you sold, you’d want to keep doing what you've been doing while running your business, you’re probably better served trying to grow your business instead of selling.

Personally, I’ve worked across various industries, and running my own business where I get to work with great partners and customers is currently the most exciting thing I could be doing with my time. When I compare that with what a sale could bring, continuing to grow my business is far more exciting.

If you’re burnt out, and the day to day of running your business no longer brings you joy, you may be able to mitigate that by hiring more senior managers to help you grow your business. By bringing on support, you may increase the value of your business over time. So it’s worth considering - do you actually want to sell, or do you just need some help?

Or maybe, you’re just done working on the same thing day in and day out and ready for a new challenge or retirement. If that’s the case, selling is a great option, as you can most likely completely walk away from the business and pursue other professional or personal interests. What’s key is understanding how your finances today rely on your business and how a lump sum payment for your company will set you up for success with whatever it is you choose to do next.

Would Selling My Business Help Me Achieve My Long-term Goals?

Working in a business day in and day out often leaves owners with little time for anything else. If you’re considering a sale, it’s worth stepping back and re-evaluating your long term goals. Ultimately - how do you want to be spending your time? If it’s no longer in the business you have been running, exploring a sale can be a great option.

If your business still interests you, and you’re simply exploring a sale for financial reasons, understand that running a sales process on your business can be very time consuming. Typically, to run a successful sale, you’ll need to commit to the complex and often long process of selling a business. You’ll need to prepare all the necessary documents and package the business up for a sale, and you’ll likely spend upwards of a year talking to potential buyers and navigating a purchase agreement.

Do I Need to Sell My Business to Achieve My Financial Goals?

For most owners, selling your business will dramatically change your finances in three ways:

  1. You’ll no longer have consistent income from the business in the form of a salary and/or distributions
  2. You’ll no longer be able to expense the things you used to expense through the business
  3. If a sale is successful, you’ll have a lump sum of cash.

If your financial goals require a lump sum of cash, because say you want to retire or start a completely different business, selling is your best option. I bought my first business from a buyer that wanted to start a new company. He used the proceeds from the sale to help him grow that new business, and I bought a company I was excited to grow.

If you want some lump payment AND some residual income, there are potential ways to do that as part of a sale. If you own the real estate or equipment your business uses for operations, you could lease that back to the new buyer instead of selling it. Some sellers also do “seller financing”, where they act as the bank, and the new owner gradually buys them out for some or all of the purchase price over time.

Is Selling My Business a Cure for Burnout or Boredom?

Running a small business is more than a full time job. For most owners, it is all consuming. Work rarely stays at work, and the bigger your business becomes, often times the more responsibility you have for employees and customers. That can cause both burnout and boredom. If you’re tired of your business, selling could be a cure.

I know a woman who ran a highly successful occupational therapy company for two decades. She’d wake up at 4AM every day, manage hundreds of people and thousands of customers, and after twenty years, she was done. She wanted to buy an RV, hit the road, and write books and teach meditation workshops. At the same time, she loved the business she’d built and the people in it. She had the opportunity to sell to a private equity firm, but that ultimately didn’t align with her values. So instead, she chose to slowly sell the company back to her management team with seller financing.

She’s been happily on the road ever since, and her company is still led by people that are passionate and driven to grow the business. It was a win for everyone.

How Much Should I Sell My Business For?

Selling a business is much like anything else: it’s worth what someone is willing to pay for it. Many first time sellers can go into the sales process with an inflated sense of what their business is worth - they’ve poured their life into building something great, and the expect others to value it with as much care and respect as they do. Many business buyers will truly care about what you’ve built, but they will all value your company based on your financials. A free Baton Valuation is designed to help set your expectations by giving you a fair opinion of value. From there, you’ll be empowered in the conversations you start having with potential sellers.

What are My Exit Options?

If you’re ready to seriously consider the sale of your business, we’d recommend reviewing some of our other articles like the 3 Step Process of Selling a Business from Start to Finish and the Checklist for Selling your Business. These will help you understand what the sales process can look like in detail. We also review the three main potential acquirers including private equity, competitors, and independent buyers. Getting a valuation from Baton can also help you answer some of those financial questions we discussed earlier.

You may then consider engaging a business broker to support you in the sales process. Here’s another helpful article on how to think about hiring one.

Regardless of where you’re at in your journey towards potentially selling, know that it is an achievable process and we’re here to help along the way.  

Conclusion

I’m not building a small business with the goal of sailing off into the sunset. I love providing a needed service to my community, employing people with meaningful jobs, and making money along the way. Someday, there may come a time when I’m either ready to do something else, we get an offer we can’t refuse, or the business is no longer working financially, and it will make sense to seriously consider a sale. Until then, having a valuation still provides tremendous value as you look at ways to grow.

Wherever you are in your journey, Baton wants to support you. Even if you aren’t considering selling at all and simply want access to partners to continue to grow your business and insights like, “How much do my competitors spend on COGS or employees salary?” – you’re in the right place. Get started with Baton today.