This is Chapter 1 of Your Complete Guide to Selling Your Business. Check out our Introduction to the Guide go back to the beginning.
The Right Time to Sell Your Business
Timing is crucial when it comes to selling your business. Market conditions and industry performance at the time of sale will have an impact on the price you can get for your business. Determining the best time to sell is an art rather than a science, but there are two important factors to consider for every sale:
(A) the recent financial performance of your business; and
(B) market trends for your industry.
(A) Financial Performance
A business’ financial performance is a major factor in determining the purchase price. The goal of the seller should be to obtain the best possible price for their business. The price will differ depending on many factors, including whether the growth of the business is increasing, fading or stable.
Stages of Financial Performace
|Growth Phase||Recent Financial Performance||Expected Best Time to Sell|
|Growing||The business’ financial performance has improved year on year over the
last two to three years.
|Selling the business towards
the end of the growth period will maximise your sale price.
|Stable||The business has not experienced major profits or losses in the past two to three years and the industry is relatively stable.||Find a buyer while maintaining steady performance and keeping ahead of industry trends or changes.|
|Fading||Financial performance has been declining. High debt levels and outstanding expenses are a strong indication of a fading business.||Manage your expectations for a lower purchase price, continue trading until performance improves, or implement a transformation strategy. Look to reduce costs by renegotiating agreements with suppliers.|
Tip: Selling a Fading Business
Selling a fading business can be difficult – declining financial performance is detrimental to the purchase price. In this situation, you could consider selling the business’ equipment through an Agreement to Sell Equipment. This is different to a business sale because you are not selling the business’ goodwill or intellectual property. Usually, an equipment sale is not an attractive option for a seller if the equipment is key to the business continuing to operate because the seller will remain responsible for the lease and any other ongoing contracts. Alternatively, a seller may want to consider implementing a transformation strategy or if financial performance continues to decline, appoint external administrators.
How to Conduct Market Research
There’s rarely a ‘right time’ to sell your business. And determining the ‘right price’ is next to impossible. But some research can be valuable when it comes to choosing when and how to sell your business. Your market research should focus on two areas:
(1) future demand for your product or services; and
(2) demand for your business.
(1) Future Demand for Your Product or Services
A business’ value should always be measured by its future cash flows, which are partly determined by the future demand for your product or services.
Economic and industry trends can have large, long-term effects on sales and profit. For example, when consumer confidence is high, customers are more likely to spend disposable income on goods and services, like clothes and entertainment. The increased demand for product and services could mean business owners can charge
To find economic and industry information, start by reading the economics section of the Australian Financial Review. To go deeper, check out the economic commentary from the Reserve Bank of Australia. Finally, the Australian Bureau of Statistics is a trove of industry-specific data.
(2) Demand for Your Business
Just like the housing market, the market for businesses is cyclical. If there is more demand than supply for businesses like yours, you can request a higher price. For example, if more people want to purchase a cafe than there are cafes available for purchase, then owners of cafes can charge a higher price when selling their business.
Determining the relative levels of demand and supply for businesses can be a challenge. The best way is to ask a business broker. Brokers are experts who spend their days scanning the market for businesses — gauging demand and assessing supply. Speak to three or four brokers from different organisations to make sure you get a balanced view of market conditions.
Finally, spend a few weeks scanning the listings for businesses similar to yours that are on the market. You will start to get a sense for the value of your business by asking, at what price are they selling? and how long do they take to sell?
Tip: How to Conduct Market Research
Keep your objective in mind when conducting market research. It’s easy to get lost in the ocean of information available to you. Focusing on your objective will ensure
your research is targeted and efficient.
Drafting an Exit Plan
Selling a business that is underprepared for a sale can negatively impact the buyer’s perception of your business, and the purchase price. Before speaking with potential buyers, you should plan for the sale by drafting an exit plan setting out the steps you need to take to ensure you can sell your business for its maximum value.
The exit plan should deal with:
- the value of the business and the assets;
- your business’ growth trajectory to date;
- staff and client transitions;
- training programs for possible successors;
- timeframe to sell and handover the business;
- your involvement with the business after
you sell (i.e. partial or full sale); and
- asset ownership including any valuable
(B) Market Trends
In addition to the financial performance of your business, market trends can affect when it’s a good time to sell.
If you have any questions before you continue reading, you can contact LegalVision’s sale of business lawyers by calling 1300 544 755 or filling out the form on this page. Now that you know when it might be the best time to sell your business, depending on your specific circumstances, market trends and what stage your business is at, read on to find out how to prepare for the sale of your business.
This chapter was an extract from LegalVision’s Sell Your Business Manual. Download the free 36-page manual featuring the sale process, preparation checklists, and your cheatsheet for negotiating terms.
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