By Jan-Philipp Peters
Many founders of small businesses eventually encounter the question “Should I keep running my business or sell it?” Reasons for selling can be many, ranging from new family commitments, retirement plans, a desire to start new project, or simply falling out of love with the business. In any case, the decision is never easy. There are 10 questions any founder should answer to make the right call.
10 questions to ask before you sell your business
1. Can the business be sustained in the long run?
Does the company occupy a niche with little change or competition? An example could be a landscaping business. Oversimplifying a bit, a landscape business owner only needs to keep operations running, but not constantly worry about being out-innovated.
On the other hand, if the company operates in a more fast-paced market, there should be strategies in place on how to keep up with the changing environment. Here, an example could be a software as a service (SaaS) business.
The decision to sell a company should also factor in whether or not you're up to the task of constantly innovating upon your product or service, and willing to manage constant change.
2. Is there a challenge the business is not equipped to handle right now?
Expanding on the first question, every industry at one point or another experiences a moment of pivotal change. This change gives birth to many new companies, but also poses serious challenges to the incumbents. If they do not manage the change well, they might go under.
An example of this is the e-commerce revolution. Many small retailers selling books went under, while internet shops like Amazon took over the market. If you find your company in a similar situation and don't have the capabilities to adapt to these changes, consider either onboarding a strategic partner to help transform the business or selling to a buyer who can.
3. Can the business be passed on?
Many small business owners are, of course, very attached to their company and would prefer to see it in the hands of a close relative or friend, rather than a stranger who buys it. To this end, consider having a serious conversation with any potential “heirs” of the business and find out if they would not only be up to the challenge of running the company, but are generally interested in taking it over.
4. Could someone else take over daily operations?
Sometimes a founder wants to exit the business simply because they no longer want to run the day-to-day operations. One option for leaving the operational side of the business while staying invested is to hire a CEO. With a new person running the business, it frees an owner to either exit the company, focus on strategic tasks, or step down to take over a function within the business, such as running the marketing and sales departments only.
5. Can you sell a piece of the business?
An alternative to selling the entire business is a partial exit. This entails selling a piece of the company to an investor who buys a portion of its shares while the founder retains the rest. In this case, private equity firms usually buy a controlling interest (51% equity or more) while other investors, like high-net-worth individuals, are usually more inclined to buy a minority interest (49% equity or less). A partial exit allows a founder to get liquidity from their ownership while staying invested in the business they built.
6. Is there an opportunity to “double dip”?
In line with selling a piece of the business, there is also the opportunity to “double dip” when seeking a complete exit from a company.
The double dip refers to a founder first selling a stake in the business to an investor and realizing an immediate cash return. This transaction usually takes the form of a majority stake sale of secondary shares to a roll-up or search fund. A few years later, if the business increases in value substantially, both the investor and founder can then sell the company together in a full exit to a third party. Selling their remaining shares in the second dip can yield a significantly higher return than if all of the stock had been sold in the first transaction.
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7. Is market timing right?
It's important to consider timing. Usually, it is best to sell a business in the expansion phase of a business cycle. This means that the economy is growing, investors have easy access to cheap capital to buy out businesses, and valuation multiples are high. Selling in this phase means you can expect to be paid more for the business than what you'd be paid selling the same business during a recession or depression phase of the cycle.
Other market factors can also influence the right timing of a sale, such as if a large competitor is consolidating the market and is willing to pay large premiums. Another possible scenario is the overall market is growing extraordinarily and strategic buyers are looking to enter the market by acquiring an existing player.
8. Is the business in good shape to be sold?
Most investors seek a profitable business with few complications and red flags. For example, a pending lawsuit involving the company could be a deterrent to most buyers. On the other hand, if the company is more profitable than ever, growing at a positive rate, and has a stable market outlook, it will attract a lot more investors and higher valuations.
9. Has an advisor been involved?
Many founders looking to sell their business have never sold one before. Hence, there are many pitfalls and unknown unknowns to be considered. Professional help in the form of an advisor can be invaluable to ensure you get the most out of the process. An advisor can help find a reasonable valuation for the company, support negotiations with investors, help you avoid legal hiccups, and offer advice on tax considerations.
10. Are there competing offers?
Competition is key in an acquisition process. If you have only one offer from an investor, the price for the business is set. However, if multiple investors are competing to buy the company, you are in a much better position to negotiate and get the best price possible.
RELATED: 10 Questions to Ask Investment Bankers When Selling Your Business