Knowing When a Business is Ready for Sale
Jul 19 2017
There may come a time in the lifespan of a current business where its owners find themselves at a financial and professional crossroads, so to speak. Perhaps there’s a desire to diversify, or maybe liquidate the business as a whole.
In some situations, though, business owners find that the best plan of action is to sell. Knowing when to sell can be a difficult decision to make, so we’ve created a comprehensive guide to help steer seller agreements in the most lucrative direction.
Financial vs. Strategic Sales
If there’s ever been a wonder as to why one seller closed out with a much higher bottom line than another, the explanation is pretty simple. There are essentially two types of company sales: financial and strategic.
With any financial sale, the acquirer is typically looking to buy the rights to any potential streams of the profit the business may come across in the future. There’s a higher risk that comes with purchases like these because they’re mitigated based on projected success, regardless of how well the business has done in the past.
A strategic sale comes about when the acquirer is more interested in how the newly acquired business is going to bolster their existing portfolio of businesses and other investment. Think of it more as an augmentation, than an acquisition.
Most strategic sales tend to have a higher price tag because a buyer sees something in the company that could make it more profitable in the future.
Knowing this, making a conscious, thorough assessment of a business is the best way to determine which type of sale that company is most likely to be considered for.
A business owner, or partnership, that’s worth its salt will already have a three, five or ten-year plan in place. Sometimes, the reason companies decide to sell is simply because it was already written in stone.
Businesses like these can be risky as well, because if it reaches its five-year limit, regardless of how successful the business ended up being, owners will still adhere to the plan and likely sell to the lowest bidder. Obviously, the other side of this situation is that a company has exceeded their year-to-year goals, making their business far more attractive to sellers. This could create a bidding war, of sorts, so be mindful.
Running any business is a mostly human responsibility, and as time goes on, there are factors that can cause a business owner to reconsider their current situation. Stress, anxiety, mental issues, and general disinterest are all viable reasons why someone would want to get out of the game.
Furthermore, depending on the type of industry, the tide may have changed out of favor of whatever a business owner had put all of their time and resources into. Changes in consumer demand, outsourcing and automation are all major factors that have caused companies to either diversify, or sell off. So, keeping an open dialogue with a business owner is a good way to stay one step ahead of the competition.
Assessing the Situation
It comes as no surprise, but keeping an open channel of communication with business owners, as well as staying abreast of industry changes and financial climates are the best way to gauge whether a company is on the verge of selling.
Getting an accurate and current business valuation is a viable way to build a rapport, too, so contact PeerComps today to learn more about our business valuation services, or start a free trial to see our software in action.