Selling your business is the final chapter in your firm’s journey. Some owners look to use the proceeds for a new venture, whereas others plan for retirement. Regardless of your reasons, the goal is to maximise your company’s value.
Sadly, most business owners fail to secure the true value of their companies. One study found that 70% of business owners sold their businesses for 50-60% below their fair market value. Read this guide to avoid becoming part of this group.
Can you sell a business for more than it is valued at?
Fair market value is one factor determining a business’s sale price, but it doesn’t account for the entire picture. Sometimes, businesses sell for higher than their fair market value because the buyer perceives them to be worth more.
For example, eBay purchased Skype in 2005 for an eye-watering $2.5 billion. In this case, the marriage ended in divorce, with Microsoft purchasing Skype six years later for $8.5 billion. This is despite Reuters reporting that Google and Facebook valued the company at $3-$4 billion at the time.
It demonstrates that buyer perception and market competition can enable companies to sell at values far above what people think.
What is important when selling a business for the most profit?
Selling a business for the highest value is all about finding a buyer willing to pay that price. Often, it’s a matter of timing and getting lucky, but it’s also about planning and marketing your business sufficiently, to the right pool of buyers.
In this section, we discuss the most crucial factors influencing whether your business sells for the higher end of its market value.
Planning ahead
Quick sales are the death knell for maximum value for the same reason rushed house sales command lower values. The smell of desperation will always result in lower offers because a buyer knows you need to sell. Conversely, businesses looking to acquire firms with no urgent need to sell will typically pay a premium.
Planning ahead lets you get the best possible value because you are prepared for the process. This means:
- Identifying non-obvious buyers.
- Providing buyers with appropriate documentation proving your company’s value.
- Assembling a sales team to manage the process.
- Getting your timing right.
- Preparing for the transition.
- Acquiring three years of accounts.
Planning is also a crucial part of succession planning. If your business cannot operate with your direct input, this represents a negative for buyers. However, if you’re already delegating tasks, this is a plus because it’s work a potential buyer doesn’t have to do when they complete the deal.
Timing the market
Timing is everything. Selling when your industry is experiencing a downturn means the buyer is more likely to acquire at a significant discount. But what does good timing mean in practice?
Firstly, examine the overall economy. In 2023, interest rates soared, making financing for mergers and acquisitions more expensive for buyers. Likewise, recession fears can mean buyers are less likely to take risks when buying.
Next, there’s the micro-economic environment. The UK’s economy may show positive signs, but that doesn’t mean your industry is following the same direction of travel. Examine how your industry looks and the industries related to it.
Finally, stay aware of other business sales in your niche, including direct competitors. Significant transactions can reduce liquidity in the market, but they could also spark new interest from acquirers.
Maximise your profitability
The most significant number of buyers examine when determining whether a transaction makes sense for them is profitability. Planning for a sale in advance enables you to make your numbers as attractive as possible.
Actions could include:
· Reducing unnecessary costs.
· Taking steps to increase your revenues.
· Eliminating extra liabilities.
· Revaluing assets on your balance sheet.
· Holding off on significant investments.
Typically, buyers will emphasise your previous three years, so if you can enter a purple patch during this period, you’re likelier to extract maximum value from the deal.
Futureproof your contracts
Customers, suppliers, landlords and other connections may have contracts with your business. Buyers want surety when they receive the keys to their new business, and they’ll pay a premium for it.
If your suppliers and customers have just renewed their contracts for the next five years, it protects the business and makes the company more desirable. On the other hand, if your biggest customer’s contract is about to expire near the date of sale, this puts your business on shaky ground.
Demonstrating a golden future for your company after you’re gone assures buyers they’re purchasing a bright venture.
Transition management
Buyers may seek support to manage the transition from one owner to the next. This could include employee training and consultancy services, especially if the buyer isn’t experienced in your niche. It also acts as a bridge between existing customers and suppliers.
Offering to stay on for six months to a year is another perk of the deal and allows for a higher asking price.
Marketing your business for sale
The greatest value for your business is ascertained through marketing it as widely as possible to qualified buyers. This is part of the value of hiring a business broker. Brokers with experience in your niche understand where qualified buyers are likeliest to be found. They’ll work with you to establish a marketing plan to maximise the deal’s value.
One of the most common mistakes is not marketing the business to direct competitors. Many of the most lucrative deals involve competitors coming together. For example, British American Tobacco acquired Reynolds American Inc. for £40.1 billion in 2016 to create the largest tobacco company in the world.
Working with a broker who can unlock these buying opportunities is the key to stimulating interests and commanding the highest offer.
Negotiate hard
Exemplary negotiation skills are required to acquire the best-value deals. The buyer wants to minimise the price they pay, and the seller wants to maximise it. How do you know if you’re getting a good deal?
It goes back to valuing your business at an amount you can reasonably defend during negotiations. Entrepreneurs are notoriously bad at this. That’s where hiring a professional business valuer comes into play.
Skilled business brokers act as impartial intermediaries during business negotiations. They don’t just “put on a show” but use their facts, legal expertise and industry intelligence to demonstrate why the asking price is a great deal for the buyer.
Above all, a business broker will not force a deal. They will tell you whether it’s better to accept or walk away.
Hire a business broker from day one
Business brokers are multifaceted professionals who support firms in the process of selling up. Due to what they bring to the table, it’s common sense to hire a broker, whether you’re a small business or a multinational company.
Some of the benefits of hiring a business broker to manage your deal include:
Harness their Professional Network – Brokers have industry connections that can put your brand in front of as many eyes as possible. They know how to market your company and uncover non-obvious buyers willing to pay a premium.
Objective Valuation – Brokers understand the market and the position of your business in it. With their expertise, they can work to maximise and justify your business’s value.
Confidentiality – Brokers protect you from bad-faith sellers through an intricate web of confidentiality and non-disclosure agreements. This ensures you’re not disclosing information that could damage your sale.
Buyer Screening – Your broker takes the time to screen potential buyers to ensure they’re serious. This prevents wasted time and allows you to focus on genuine opportunities. Plus, they can work with the buyer to secure financing for the purchase.
Representation – Most brokers are also skilled negotiators, acting on behalf of sellers during complex negotiations. They know how the process works and how you should approach them.
You wouldn’t avoid hiring a solicitor to manage a significant business contract, so why would you avoid hiring a business broker to sell your business? These professionals are an investment that pays for themselves many times over.At Hilton Smythe, our experienced business brokers fight your corner with their decades of expertise in buying and selling business. Increase your chances of maximising your business’s value by contacting our team today.
