Buying or selling a business isn’t like the transactions we engage in every day. They’re vastly more complex and far more emotional. It’s impossible to avoid this when the stakes are so high. If you’ve spent 20 years building a business, it’s only natural that when it comes time to sell, you’re going to feel strongly about it.
Succession planning is never easy, but it can be a major blessing if you approach it the right way. From your very first small business valuation to the plan for selling your business, you can negotiate a successful business sale that leaves your employees in good hands and you appreciably more wealthy. But it requires planning. Here are some key tips for negotiating a business sale that leaves behind a legacy of success for everyone involved.
Tip #1: Know Your Worth
Before you consider retirement, you have to understand how to determine the valuation of a business. This means getting a clear sense of what your company is worth. Selling your business will be an utterly confusing and frustrating process if you don’t know your business’s market value.
That said, determining your business’s market value can be a complicated task. Some people base their business valuation on revenues, using a rule of thumb that a business is worth two times its sales revenue. Others expect a price-to-earnings ratio of about fifteen.
Look at recent business sales in your industry. Find out as much as you can about the sales and revenue of those businesses and see what they ultimately fetched as a sales price. This will provide you with a steady guideline to work from as you sell your own business.
GrowGrade’s free online valuation tool allows you to accurately calculate your business’s worth. We use industry-specific formulas to give you the best possible valuation.
Tip #2: Don’t Approach it Like the Usual Sale
Many of us are familiar with the concept of negotiating a sale on a smaller-ticket item. Even if you’re the type of person who never fails to walk out of the car dealership feeling victorious, negotiating the sale of your business will be a tall task.
Harvard Business Review points to a sale between Mittal Steel and Arcelor, Europe’s largest steel company. “Suppose that founder Lakshmi Mittal had simply set up a meeting with Arcelor’s chief executive to hammer out an acquisition,” wrote David A. Lax and James K. Sebenius. “However persuasive Mittal’s pitch, Arcelor would have rebuffed it.”
Instead, HBR points out that Mittal Steel took a campaign approach to the sale. They created multiple financial agreements to hammer out. They established separate dealings across multiple continents. By starting with the smaller tasks first, Mittal Steel eventually won enough support to overcome those opposed within Arcelor’s leadership.
The same is true no matter whether you’re a buyer or seller. If you’re a seller, this isn’t going to be like an interaction at a yard sale. You need to know your value, learn what the buyer proposes to do with the business when you’re free of it, and understand how the process will take place. If you do your homework, you can go into the process with a lot more confidence than if you take every stage as it comes.
Tip #3: Start Succession Planning Now—Even if You’re Not Selling Yet
Succession planning is a bit like having a personal will. Not everyone wants to think about it, but a good one can give you an unexpected amount of peace of mind.
The only problem? We can’t tell you what your succession plan might look like.
You might simply want to exit your business and wash your hands of it. Maybe you have a clear idea of who will take the reins of the business after you step away. Regardless, you need a blueprint before you get started. That means answering fundamental questions like:
• How will a business sale affect the day-to-day operations of the business?
• Who will take my place at the position of leadership after I’m gone?
Check out this post on some consideration you’ll need to make, but there’s no hard and fast rule.
Tip #4: Get the Timing Right by Starting Early
The above point hits on an important factor: planning is always important. The earlier you can start it, the better your chances are for nailing the timing.
Consider how a pilot approaches a successful landing. They consider everything: the speed of the wind, the runway they have to land on, what the tower is telling them about air traffic, etc. Only with a successful plan in place do they descend to the runway. It’s simply too important to get wrong.
You can do the same by starting your planning early. Remember: if it’s still emotionally raw for you to think about selling the business, these are just plans. You can always scrap them later if you want. But it will always be better for you to define the success you want—and create a list of steps for achieving them.
The old adage holds true here: Plans are useless, but planning is indispensable.
Tip #5: Shop Your Buyers
If you have something to sell, you’re the one in charge. You get to decide when the sale happens or doesn’t happen. Embrace that position of power! Approach family or existing stakeholders. Talk to suppliers. Talk to customers and staff. Let people know about the succession planning you’ve put into place. As you shop your buyers, you may find you have multiple options. This will only serve you as the process goes forward, as it means you can select the buyer that’s most in line with your succession plan.
Of course, none of these tips will work if you don’t first know your value. That starts with a successful valuation. Get the right valuation before you head to market with GrowGrade’s free and accurate online tool.