The Time To Sell Your Small Business Is Now! Or Is It?

INTRODUCTION:

Readers of my business valuation blogs would be well versed on why getting a business valuer to properly value their small business is highly recommended. Too often a rule of thumb multiple of EBIT is quoted by various advisors but when it comes time to sell, the result can be vastly different and usually much lower than expected as the business was not ready for sale and should have had its weaknesses addressed years before.

So when is a good time to sell? What things should you consider before doing so?

Figure 1: Is your business dressed up and ready to sell? Photo courtesy Lara Solari Gallery balmain

1. The Current Industry Prices Are Going Up

A bird in the hand is worth two in the bush they say. If prices of similar businesses in your industry are receiving premiums, it's important to understand why this is the case. Then you can make a decision whether the prices being paid for predictions are sustainable. Ask your small business accountant for industry research journals such as IbisWorld which will give you insights on where your industry may be headed. You might not agree of course but going to the trouble of being aware of well researched opinions will give you an advantage over those who go in buying businesses based on figures alone.

2. Revenue & Profits Are Increasing

If you are selling a business it's almost like selling a house. If it is rundown and revenue and profits are dropping, it's going to be hard to ask for a decent price. Business valuers will look for business growth, trends in profits, revenue, margins and increasing liquidity through better cash flow management. If debtor days and inventory days are getting higher, this could indicate poor management. Lower supplier days could indicate that suppliers want to be paid first before they will release goods or services. Taking over a business that has these issues will mean that a discount on your sale price will be expected. Again getting business valuations Sydney performed can be a very good idea to give yourself some goals to improve your business value and performance.

Figure 2: After you sell will you have enough to go on trips in retirement? Photo courtesy Balmain Baz & Lara Scolari Gallery Balmain

3. Small Business Capital Gains Tax Concessions Are Satsified

Before selling your business it's important to know how much tax you are going to have to pay as a result of the sale. The main tax will be capital gains tax. After deducting tax, even if you get your asking price you might realise that you wouldn't have sold in the first place.

In some cases you may or may not satisfy the small business capital gains tax concessions. If you can see that you currently satisfy these (e.g. $6 million test) but can see that in 12 months to two years you may not, you might be better off selling now while you do as the difference after tax can be enormous. This is where you need to talk to your small business accountants Sydney & Dubbo to find out where you currently stand.

4. You Have Enough To Retire With The Sale After Tax

If you are planning on using the net proceeds after tax as part of your retirement, if you know the minimum price you need based on certain assumptions (years to retire, life expectancy, inflation, how much you want to have to spend each year in retirement etc), you might consider selling now. If the business does not value up enough to allow you to do this, it's time to fix the 'value gap'. This is where a business valuer can point out the ares you need to correct and then what effect it might have on increasing the sales price. Again, it's a bit like selling a house. A lick of paint here or a rearrangement there can do wonders although with businesses these changes can take up to 2 to 5 years sometimes. Get in now and find out what you need to do!

Figure 3: How much will the tax man get when you sell?

5. Key Management Are Retained By A Partial Sale

This is fairly common but should only be done for the right reasons and shareholder agreements should always be very thorough. Keeping key personnel with your company is sometimes a good reason to look at a partial sale particularly if you are getting out in the short to medium term as if they are gone, the business might not be worth as much and you will have a harder time finding somebody to buy it without the people who were largely responsible for helping making it great.

CONCLUSION:

Should you sell your business now or wait? There are so many things to consider but have a look at the above tips and you might find that you will be able to make the decision much more easily!