Selling your business – it is all in the timing

We are often asked by clients when is the right time to sell my business. The answer is that it depends on a number of factors and it is invariably different for different business owners. The one constant is that it is never too early to plan.

The factors that determine when you should sell include:

A. Is your business saleable?

Where your business income is based on personal skills or personal relationships that cannot be transferred to a purchaser then the costs of selling will often exceed the sale price. If this is the case, you are better to find this out sooner rather than later so that you can cross off the sale of your business as an exit option.

B. Do you need all of your current business income to cover your current living costs?

Most businesses sell at a price in the range of 3 to 5 times earnings. So even at the upper end of that range, it equates to a return of 20% per annum.

So what return will you get on the money from the sale of your business? Sound financial planners will tell you that a conservative investment portfolio will get you something in the range of 6% to 8% per annum. This is less than half of what you have been getting from your business. So think twice about selling your business now if you need most of your business income to meet your living costs.

C. What assets are the drivers of your business income and are you in a position to protect them and to be able to transfer them?

Identify what assets are the drivers of business value and take steps to make them saleable. For instance:

  • if it is location, say a shop, then make sure you have a long lease and the ability to assign it
  • if it is intellectual property then register it with a patent or trade mark or copyright
  • If It is systems that are unique to your business, document them (don’t just leave them in your head)
  • If it is key staff, consider ways to lock them in to the business
  • if it is a customer base then document everything you know about the customers

Don’t look to sell your business until you have done these steps. This will maximise the earnings multiple you will achieve.

D. What is the veracity of your financial information?

If there is one thing that you should take away from this article it is the value in having your financial accounts audited for three years prior to sale. We have seen evidence of businesses selling for seven times earnings plus just by having their accounts audited.

This is especially the case where there is an overseas buyer as they expect accounts to be audited and will discount the price if they are not. Giving yourself time to do this before putting the business on the market is an important consideration.

E. Do you have the correct structure to minimise tax on sale?

When you sell it is the after-tax dollars that count not the sale price you achieve. There are tax concessions available to small business. If you can access these, it will usually lead to you paying no tax on sale of your business but you have to be structured correctly and sometimes it takes time to correct.

So if selling the business is part of your future plan then talk to us sooner rather than later about whether your structure will enable you to access these generous concessions.

F. What are your energy levels to continue to operate the business?

More than often the reason that clients need to sell their business is because they have run out of energy to operate it. And these personal considerations are usually more important than financial ones.

So don’t get to the point where you are physically and emotionally drained before trying to sell your business. A purchaser will sniff this out and use it to bargain down the price.

If you feel your energy is beginning to wane then that is the time to start to plan for the eventual sale.

Conclusion

There is no right or wrong time to sell a business. It depends on your particular circumstances.

But the one constant for all business owners is that it is never too early to plan for it.

If you would like to talk to us about preparing for the sale of your business, please contact your usual Allan Hall Advisor.

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