Over the past twelve years in franchise development and working as a franchise consultant, there have been many instances where business owners and entpreneurs have considered selling their business and in the end turned to franchising realized that a more profitable and long term exit strategy would be in franchise development rather than an outright sale. With this in mind, we have had many discussions evaluating whether selling the business vs. franchising would make the most sense and how best to approach this situation given immediate and long term goals.
Questions that should be brought to mind when considering selling your business:
1. Is my business in a position and ready to sell? Documentation is king in any business transaction, we recommend at least three years of tax returns that are accurate and show maximum profitability to get the best price for your business. It happens frequently when an impulse decision to sell is made and there is no documentation to support what the business is worth. Take time, work with a professional account/cpa to organize these documents including tax returns, bank statements and all other necessary financial documentation to prove the business is worth what you are asking for it.
2. How is a business valued and what should I expect to generate in Cash from the sale of my business? With family businesses and smaller companies, often personal and business expenses are intertwined. Take the time to separate these and if you haven’t go through a year of operating and keep to a stricter standard. The cars, phone, gold membership and other items should be taken out of the balance sheet and cash flow statement to represent an accurate valuation for your business. A good way to come to a very simple valuation for your business is to either use the 1 times revenue number for a service business, or 2-3 times net profit for a year. You will then need to add the depreciated value of the assets to this to get a somewhat accurate number. We recommend speaking with a good business broker with experience in business valuations to come to a good sales price. Market fluctuations, trends in your industry and other factors will greatly impact these business valuations as well.
3. Who should be on my team when I sell? Have a good accountant/cpa on your team first, this is number one. They should support you in organizing the financials and needed information to present the sale. You should also have a good attorney on the team to help you in any legal matters that arise and to manage any of the contractual work needed in closing the business sale. Good business brokers and professionals will also be incorporated to help market and effectively find buyers for your business.
4. Is it the right time to sell? Many business owners wait till their business is on the decline to sell and only are interested in selling when the business probably won’t attract any buyers. That’s really the exact opposite of what you should do – consider selling when the business is either on the way up or doing well enough to present to a serious buyer.
5. Is the market right? Before selling, look at current market conditions for your industry and confirm that there is a growth opportunity for what your business provides. In order to attract buyers, make sure that the market you are in has opportunities for growth and will be interesting to a buyer.
6. Can my business still be successful without me or without a key customer? Systems, processes, procedures and having a diversified customer base will allow you to make your business more presentable.
7. Is it Normal for a business owner to stay on after the sale? Sometimes you can seal a deal by agreeing to stay on in a consulting role for a period of 6-12 months. This provides the buyer with a sense of security in knowing that the owner will be there with them when they get started. As the business owner, you need to make sure that with this kind of deal in place that the transaction still makes sense for you.
8. What are the potential land mines that could break the deal? Unresolved issues can rear their ugly head and interfere with a sale, particularly in areas such as company ownership, accounting and intellectual property rights. For example, an owner may have used a contractor to write software for the company without requiring him to assign his rights to the company.
9. Would I consider alternatives to an outright sale? If an outright sale isn’t right for you, a CPA or investment banker can help evaluate other options. How about structuring a deal to pass on the ownership to employees through an Employee Stock Ownership Plan (ESOP)? Would you consider selling a percentage of the company to a private equity fund? Or would you do a leveraged recapitalization, which is a loan that puts a portion of the proceeds in your pocket?
For more information on how to sell your business or whether to franchise your business, contact us: 800-610-0292