Not all small business owners want their businesses for a lifetime. Many are keen to build value in a business and sell it off so that they can move on to other endeavours. But, even if your business has been your entire career, when you get to retirement age, you’ll still be looking to sell. Some owners are driven to put their businesses on the market due to financial needs. Others realize that outside investment is essential to future growth.
The owner who has her business in good shape with a solid history will be well-positioned for a clean lock, stock and barrel sale. And of course, selling your business when it is doing well is most likely to generate the highest price you can achieve. But it is not the only way to sell your business. If your business doesn’t have exciting potential as a going concern, it may still hold value that sellers will be interested in.
So, what do you have to sell?
Intellectual Property (IP)
Intellectual property (IP) is often poorly recognized and subsequently under-valued by small to medium business owners. IP is an idea, invention, discovery or creative expression such as designs, names and symbols. IP Rights are protected through mechanisms such as patents, trademarks, copyrights and, in some countries, as trade secrets. You don’t have to have the recipe for coke a cola or the code for Windows to have valuable IP assets in your business. You may have a unique manufacturing process or a particular customized system that you use with clients that delivers exceptional results. It is important to take stock of your IP and to document it.
If you are in a leadership position in your market, competitors are more than likely to regard your customer base as a highly valuable asset. The value of your customer base is most likely to be determined by the size of your market share represented by your total sales.
It is possible that it would be easier to sell the assets of your business, and for a better price, without the liabilities. This sort of sale requires careful planning though. You need to ensure that if you sell off everything of value, you will achieve enough from the sale to cover your liabilities such as the costs of employee entitlements and redundancies, as well as the costs of other obligations such as leases, contracts and tax.
You may have well-established distribution channels with solid agreements in place that might be attractive to a supplier of yours. You calculate the value of a distribution channel based on how much potential there is for them to pump products through it, enabling them to increase their sales, profit margins and market share.
Who are your potential buyers?
Apart from going through the usual channels to find an outside buyer, you can consider:
Facilitating a management buyout
You may have management personnel who have a passion for the business, the drive to keep it going and the ability to access the necessary capital in order to buy it. Some business owners may even provide financial backing for their management team to buy the business, which is known as an ‘earn out’ strategy. That option may involve staying on for some time in a consultant position to help manage the transition, specifying performance criteria in the sales agreement and tying the price of the business to performance for a period of time.
Keeping it in the family
Many business owners have built their businesses as a legacy to be passed on to family members. In this scenario, business owners are unlikely to realize the value for the business that they could achieve through a sale to an outside party. You can consider mitigating against this by stipulating in the sales contract that future performance-based ‘bonuses’ are paid to you as specific milestones are reached.
Winding down your stake
You may be interested in attracting a passive investor who wants a secure investment through gaining some of your shareholding but is happy to leave you with management control over the business and its future direction. You will need to convince a passive investor that your business is growing in value and can pay dividends regularly.
Bringing in the angels
Angel investors are generally those who seek out alternative investment options that are likely to deliver a high level of return on their investment. For a business owner, they can be a good option, especially if they can offer not just cash but connections and expertise as well. Unlike passive investors, the angels expect to have some control over their investment, such as a seat on your Board. You can expect that if your business doesn’t perform, their investment is most likely to be short term. You need to tread carefully with angels investors. If they become the majority shareholder of a business where most of your wealth is locked up, they have the power to exercise their right to take control of the Board and restructure your business.
Like you, these potential buyers, as well as the outsider others, are all looking for value. Know the value in your business. Get professional advice when you need it. Make and implement a clear plan for selling or transitioning your business.