3 Questions to Determine If Your Business Is Ready to Be Sold – and What to Do If It’s Not
You may love running your business. But as your company scales and matures, you may start to think about what’s next. For many CEOs, that means getting your business ready for sale. The first question to consider: Is your business saleable?
As many business owners are dismayed to discover, just because you want to sell your business does not mean that your business is ready to be sold. Evaluating how saleable your business is today will allow you to chart your best path forward. Your ultimate goal is to make your business so attractive to potential buyers that you’ll be able to command an attractive price.
Whether a business is saleable depends on three factors:
- The state of your business from an operational functionality and management standpoint
- The company’s profitability
- The industry in which your business operates
Factor 1: Can Your Business Operate Without You?
Perhaps the most important criteria in getting your business ready to sell is ensuring that your business can function without your day-to-day involvement. If you have to be present and engaged for the business to operate, your business is not ready to be sold. As soon as you sell it and leave, the business will collapse – and that is not an attractive proposition for a potential new owner.
To step back from daily operations, you must have the right staff, systems, procedures, and operations in place. Other people must be able to perform all of the functions in your business – without needing you to tell them what to do, solve problems, or answer questions. The business must be able to run like clockwork without you.
This doesn’t mean that you must be completely removed from your business. You can and should still be present to provide leadership and strategy. You’re able to fill this particular role, because your company’s new owners will ultimately take on these responsibilities.
Extricate Yourself From Your Business
Entrepreneurs often start their businesses as a dream. Their initial goal is to replace the salary they were making at the job they were working right before they left to pursue their dream full time. They wear all the hats, fueled by a passion to make their dream work.
As the company starts to grow, they start to delegate some of their responsibilities. First, they hire an executive or virtual assistant to remove administrative duties from their plates. Then they start delegating other tasks that they don’t like to do, that they aren’t good at doing, or that don’t require their unique gifts and talents.
They’re then left with one or more critical functions on their plate. Because these responsibilities lie in their “Zone of Genius,” they think it’s OK – especially when spending the majority of their time in the Zone of Genius results in significant revenue for the business.
When your goal is to have your company run profitably while you work in the business and get to achieve some level of work-life balance, this division of duties may be good enough. But when you’re getting your business ready to sell, you must delegate even further. It’s time to shed the Zone of Genius activities, so you’re truly removed from daily operations. You simply cannot be involved in the delivery of the core products or services your company offers.
Also consider other roles you are filling that you assume others will take on easily once you’ve left the business. For example, many business owners find that after extricating themselves from service delivery, they get “stuck” in sales. Champion of their company’s vision and mission, they have a gift for connecting with prospects, understanding their customers’ needs, and being able to passionately articulate what the company offers. This apparent gift for sales makes it challenging to delegate the sales position. But beware: If you’re your company’s top salesperson, your business Is not yet ready to be sold.
As you’re getting your business ready for sale, remember that the only responsibilities you should keep are things that new owners would assume themselves. If the new owner won’t be filling the role, you must delegate it now.
Ensuring a Smooth Transition
You’ve set up the systems and hired the right team. You’re handling only responsibilities that belong on the CEO’s plate, such as strategy and leadership. Technically, you’ve met the first criteria needed for getting your business ready to sell. Congratulations – your business runs without you.
But potential buyers may still be wary. When an individual or company professes interest in buying your business, they are buying the idea that the business will continue to function profitably. For their investment to pay off, your company needs to continue performing well. Your departure may jeopardize performance, simply because of what your energy and presence mean at your business.
To minimize the disruption caused by your departure and to ensure a smooth transition to a new era of ownership, ensure that you have a strong, committed and skilled second-in-command who is willing to stay with your company once it is sold. Better yet, have an entire cadre of committed and knowledgeable people who will stay on with the new owners to ensure that the business continues to run.
Factor 2: How Profitable Is Your Business?
Your business should be generating a profit. After all, the purpose of a business is to make money for its owners and shareholders.
When you’re getting your business ready to sell, the amount of profit your business generates becomes of particular importance. To determine whether your business is more saleable, evaluate how your company’s numbers compare to industry standards.
If your Gross Profit Margin (GPM) is 40 percent, but the industry average GPM is 60 percent, your company is not ready to sell yet. You must be able to meet industry averages at the very least or there must be a viable difference in your business model that accounts for this difference in gross profit. Therefore, a key step getting your business ready to sell will be finding ways to increase profitability.
If you’ve been focused on scaling your business, good news. Much of the work that you do when scaling your business will lend itself to making the business saleable. As you scale, you naturally find new ways to operate the business, bringing in team members to do the work and systems to ensure that the work gets done properly. As you scale, you increase the level of efficiency and effectiveness with which the company operates. As production increases and costs decrease, you’re able to achieve economies of scale. Not only does your business run smoothly without you, your revenue and profits increase.
If you’re in the opposite position, where your numbers at least meet, if not exceed, industry averages, then you’re ready to sell.
Factor 3: What Industry Are You In?
The industry in which your company operates affects your ability to sell in three key ways.
- Profitability. As noted above, industry standards dictate whether your company is profitable enough. Your GPM must at least meet industry standards.
- Valuation. Industry standards determine how your business is valued. Some industries use a multiple of a company’s revenue to determine its value. In other industries, the business value is a multiple of a company’s profit as determined by EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
- Sale price. A company’s sale price is typically determined by its business valuation. Regardless of which valuation method your industry uses, your sale price will be a multiple (for example, 3X, 5X, 10X). Within your industry, there will be a standard multiple range that is used when setting a sale price.
Answer These Questions to Set Your Course
You’ve worked hard, likely for years, to grow your business. You deserve to reap the rewards of your investment to time, energy, and even money. To set yourself up for success – which means maximizing the sales price of your company – start by evaluating how saleable your business is today. Use the 3 questions in this article to take stock of where your business is today – and what you need to address to make sure it’s ready to sell.
Want help assessing whether your business is ready to sale – and how to maximize its value? Book a complimentary, no-obligation Financial Strategies & Solutions Session with one of our highly trained virtual CFOs to explore how we can help. We’ll help you accurately answer the 3 questions above and then chart the most direct path to getting your business ready to sell.