by Steve Slowey
When is it time to sell your business? I can tell you the time NOT to sell your business is when you’re losing money. We’re going to make an assumption that your business is profitable, and that is definitely the best time to sell it.
I have a question for you. If you were to invest $1 million dollars and over a 4-year period, that million dollars was given back to you, and at the end of that 4-year period, you were given an additional $400,000, would you do it? If the answer’s yes, then I agree with you. I would do it too. Let’s talk about what I just said.
If you had an initial investment in your business of $1 million, and it cash-flowed $250,000 a year, in 4 years, you’d have your initial investment back. Then, if you sold your business for $400,000, you’d be out. Certainly, your business has more value than $400,000. But that’s the control that you get when you get that initial investment back. How quickly you get it back will determine how much value your business has and how much you can ask for it within the time frame of a lease. When we go into business, considering the length of time that you get that return on your investment is going to help you in the selling process. And there is a lifespan to a business, especially in a lease situation.
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When we start our businesses, there’s always the initial investment, the amount of money that it took to build it in its entirely. I personally would like to think that before I consider selling, I want to make sure I’ve got that money back. I think getting that money back gives me the control to realize that now, I’m playing with house money.
Think, once I have all my money back, now it’s time to at least take a look at whether or not I should sell my business. I think having an exit strategy is important. What we need to look at is, if we’re in a lease situation, a lease has a time frame tied to it. If I’m a potential buyer of your business, I’m going to want to make sure that I at least have enough time on that lease to make back what you’re asking for your business, plus have enough time to continue to make money beyond my initial investment. When you consider selling your business, you have to also take it from the point of view of a potential buyer.
Let’s consider that you have a 10-year lease on your business and within a 4-year period, you made your initial investment back. If you look at things from the point of view of a buyer, they have 6 years left on that lease before they have to consider the renewal with the landlord. Who knows what that renewal could end up being? You have to consider that they have to make their money back, plus be profitable above and beyond that.
What happens on a due diligence process from a potential buyer? Again, let’s assume we’ve made all our money back, and we’re opting to sell our business. A potential buyer is going to come in and within that due diligence process, first of all, they’re going to look at the lease. They’re going to look at all contractual obligations that come with this particular business. But the physical plant is going to be looked at also. When we think about things along the lines of electronics, TVs, point-of-sale systems, these items typically, after a 4-5 period, need to be replaced. Air conditioning on the building, they’re going to be looked at. What additional maintenance is going to be needed.That 4-5 year period is a pretty key time to start looking at potentially selling the business because we’re going to start getting into maintenance cost and replacement cost. In the due diligence process, they’re going to come in, and they’re going to look at these things. If they see that it needs to be replaced, they’re going to either ask you to replace them, or they’re going to ask you to diminish the asking price to build in that replacement cost. Remember, a lease is also a ticking time bomb. That time left on that lease is very, very important. It’s important to you. It’s important to a buyer because if you’ve taken 6-7 years and you’ve now finally gotten your initial investment back and you only have 3 years, it’d be kind of tough to sell at that point. You might consider hanging onto that business and continuing to harvest cash flow before you go into the renewal option.
Back to the initial question: When is it time to sell your business? This question is kind of subjective, but things to consider are the return on your investment, the length of time it took you to get your money back. Again, once you have your money back in your pocket, you’re in a great position to determine when and how much you want to sell your business for.
Remember, the lease has time value. The most time that’s left on that lease, the more valuable it is to a potential buyer. Lastly, again, selling your business when it’s not making any money is NOT the time to get rid of it. At that point, it’s not even really a sale of a business, it’s more what they would call an asset purchase. Typically, in an asset purchase you get about 10 cents on the dollar. Again, once you make your money back on that initial investment, at least start considering the possibility of selling your business, but you have to look at it from a buyer’s point of view.
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