How to Create a Sellable Business

One of the most exciting moments in any entrepreneur’s career is when it comes time to sell their company. In order to achieve a successful exit, however, it is important to first know how to create a sellable business. With the right approach, it is possible to build an attractive business for qualified buyers, creating the conditions necessary for an easy and profitable sale.

In this article, we will discuss:

• The pros and cons of selling your business
• How to determine if your business is sellable
• Calculating ROI when selling your business
• How to improve the saleability of your business

“One of the most exciting moments in any entrepreneur’s career is when it comes time to sell their business.”

The Pros and Cons of Selling Your Business

Before you make the decision to sell your small business, it is helpful to weigh the pros and cons of selling in order to determine if it is the right move for you. A little diligence now pays off in the long term. After all, there are many potential benefits and drawbacks when it comes to selling a business.

Pros of selling your business

One of the most obvious and substantial benefits to selling your business is the financial rewards you will achieve. If you have created a profitable and successful business, you can expect to sell it for a substantial sum of money.

In fact, roughly 50% of the total value derived from your business over its lifetime will come when you sell. This financial windfall brings with it many benefits.

For starters, it allows you to diversify your investments in order to create greater stability. As a business owner, much of your net worth may be tied up in just one asset: your business. By selling, you are able to diversify your investments.

Additionally, selling your business may open up the option of buying a family home. This is both a financial investment as well as a likely lifestyle improvement.

Aside from your financial picture, selling your small business frees up a lot of time and energy that you can direct toward family or friends. Additionally, it provides you with the freedom to pursue another business idea or work opportunity.

“Roughly 50% of the total value derived from your business over its lifetime will come when you sell.”

Cons of selling your business

While there are some clear benefits of selling your business, there are some obvious downsides as well. For one, while you will get a lump-sum payment at the time of sale, you will no longer enjoy the monthly income the business provides. Depending on your financial picture, you may need to find a way to replace this lost monthly income. This is an important factor to consider for deciding when to sell.

Furthermore, unless you maintain some equity in your business, you may lose out on any future growth your business may bring.

It is also important to consider the implications the decision to sell your business will have on your lifestyle. For many entrepreneurs, owning and running a business is an incredibly meaningful and rewarding activity. While selling your business creates room for new opportunities, you may also find yourself needing to find something new to provide the same level of meaning and engagement.

“For many entrepreneurs, owning and running a business is an incredibly meaningful and rewarding activity.”

How to Determine If Your Business Is Sellable

Before you decide you want to sell your business, you must determine if it is in a position where it can realistically be sold. That is, is your business in a state that would attract interested buyers? There are several things to think about when answering this question.

Transferability

One of the most important things to consider is whether your business can be transferred to a new owner without significantly disrupting the performance of the business. To begin with, if your business relies on your image or identity as part of its operations, then it may be difficult for a new owner to take over the reins.

If you run a travel blog that consistently focuses on your own personal travel adventures, for example, then you may run into issues when selling.

Likewise, if your business relies on a rare skill set or knowledge base, it may be hard to find an interested buyer. It is important to consider the transferability of your business when setting expectations for how easy or difficult it will be to sell.

“One of the most important things to consider is whether your business can be transferred to a new owner without disrupting the performance of the business.”

Documentation

Any serious potential buyer will want to see that your business operations are organized and well documented. If your business is disorganized, it will likely be an issue when it comes time to sell. On the flip side, businesses that have clear systems and standard operating procedures in place will be easier to sell. They will also receive a higher median sale price compared to those that don’t.

Calculating ROI When Selling Your Business

Before you sell your business you will likely want to know what your expected return on investment, or ROI, will be. While there are many factors that go into determining your ROI, you can get a rough idea of what to expect before you sell your business.

Calculating expected ROI

First, you need to calculate your business worth. When it comes to business valuation, it is wise to seek the help of a qualified Business Advisor. This will help ensure your valuation is an accurate and realistic estimate of the eventual purchase price.

There is a range of valuation metrics that are used in order to calculate the value of a business. The most commonly used option is the SDE Multiple Method. With this method, you take the Seller’s Discretionary Earnings and multiply it by a number, called the multiple.

Value = SDE x Multiple.

In simple terms, the SDE is the business’s profits before taking into account certain expenses that won’t be incurred by the new owner. The multiple is a number that captures the expected future value of the business. The exact number value of the multiple depends on many factors that indicate the health and viability of the company.

Once you have created a valuation for the business, total up the amount of money you have put into building the business. Divide the company’s expected value by the amount of money you have put into the business in order to determine your ROI.

ROI = Business value/total invested in the business

Of course, this only captures the financial investment you made into the business. It fails to capture the time, energy, and stress you expended in order to start and run the business.

How to Improve the Saleability of Your Business

It is important to start preparing to sell your business long before you intend to put it on the market. Unless you have a naturally remarkable business, if you wait until the last minute to get your business ready to sell you may have a hard time attracting prospective buyers. This can ultimately lead to selling it for less than its maximum value.

“It is important to start preparing to sell your business long before you intend to put it on the market.”

Remove your personal likeness

As we discussed in a previous section, if your personal likeness is attached to your business, you will have a difficult time selling your company. In order to overcome this issue, it is important to proactively work to remove your image, identity, or likeness from your business operations or advertising efforts. This is particularly true if you are trying to attract buyers to acquire your website.

In the travel blog example above, you would want to remove your personal image from your site. Instead of focusing on content that highlights your own travel adventures, you may consider building out content that focuses on destination guides, travel tips, and other topics that do not include your personality.

After you have demonstrated your company maintains its customer base and profit margin after your likeness is removed, your business will become more attractive to potential buyers.

Improve documentation

In short, you need to first get organized before attempting to sell your business. Systematize your business, create SOPs, and consider hiring contractors or employees to handle many tasks. The easier it is for a new owner to run your company after purchase, the more attractive it will be.

Clean up your financial statements

If you haven’t already, it is crucial to create clear and orderly financial records. You should have at least two years of bookkeeping records using monthly accrual accounting methods. If this is not your area of expertise, hire a bookkeeper who specializes in your industry.

In addition to making it easier to verify the financial performance and market value of your company, maintaining clear records and clean financial statements will help instill confidence in potential buyers that you run your company in a responsible manner. By being able to verify your revenue, cash flow, and earnings, potential buyers will feel much better about making an offer for your business.

Regardless of whether you want to sell now or in the future, it is a good idea to speak with an experienced Business Advisor to see if there are any other steps you need to take to turn your company into a sellable business.