Monitoring Market Prices
Timing is crucial when it comes to selling a business. Since 1900, 27 ‘bull’ markets have existed, when company shares rise sharply, with corresponding ‘bear’ markets, the latest example being in 2008– 2010, when over-optimistic investors get mauled as the bottom drops out of stock markets. These ups and downs can result in very steep curves, with business values oscillating by as much as a 50 per cent and the changes in the market’s perception of value often having little to do with the actual performance of businesses themselves.
Valuing Your Business
Setting a precise value on a business isn’t quite as simple as, say, determining the price of your home. One possible way is to add up the assets, take away the liabilities and in theory the difference is the value of your business. However, your assets comprise items such as stock that may be hard to value, and debtors who may or may not actually pay up. Businesses are more usually valued using a formula known as the price/earnings ratio. P/E ratios vary both with the business sector and current market feeling about that sector. The market as a whole generally trades with P/Is of between 14 and 20, with the average since 1870 being 15.
Figuring Out Who to Sell To
Determining a selling price is one thing, but finding a willing buyer is a much more challenging task. Price and buyer are inter-related factors, because whatever equation you use to arrive at business value, at the end of the day a business is only worth what someone with the dosh can pay. These are your options.
Dressing to Kill
Whoever you plan to sell your business to, you should plan ahead to make the business look its best. Blemishes such as poor profit performance, bad debts, credit downgrades and being dragged through the courts by ex-employees claiming to have been unfairly dismissed aren’t desirable. You should try to make the three years prior to your exit look as good as possible. That means profit margins should be consistently high, the sales and profit curve should be heading upwards and strong financial control systems should be in evidence.
The information in should give you an idea of what you need to know in order to exit from your business successfully. But although you should know the questions, you need advice with finding the answers. These organizations can help you find professional advisers and advice from those experienced in selling businesses.
Doing Due Diligence
When you buy a house, you and your surveyor crawl over everywhere with a tape measure to check out sizes, and employ various instruments to see whether any damp, dry rot or other unpleasant infestation exists that could affect its value. Your lawyer makes sure that the sellers actually own the property, no mortgage is outstanding and no imminent plans exist to build a motorway through the garden. A very similar process happens when businesses are bought and sold, in a process known as due diligence.
Earning Out Your Profits
One trick that buyers and their canny advisers use to make sure that your business is really worth all the bundles of dough they’re paying out is to make you do some of the hard work for them. The thinking behind this is that because you’ve been running the firm for years, no one’s better qualified than you to make sure that you keep sweet customers and suppliers with whom you presumably have a good working relationship.
Starting Up Again
Having worked out how to start a business, build it up and sell it on, you may be justified in thinking that you have a winning formula for making money: just keep turning the handle. One business founder who came on a programmer at Canfield School of Management bought out a chain of three pubs, built it up to a dozen and then sold out to a national brewery chain for a healthy profit. He repeated the process three times more and for all I know is still following his simple but effective business model. The value he discovered was that big brewers didn’t want to buy a pub or two at a time.
Before you reach this stage you should take professional advice urgently, not least because you may be liable for more expenses than you think. In theory, if you’re trading as a limited company then your liabilities are capped at your stated share capital. However, trading on after the business has become insolvent leaves the directors open to a charge of wrongful trading. In such cases the directors can be personally liable for the company’s debts.