How to Sell a Business for Top Dollar - Maximize Your Exit

Did you know that only about 1 out of 3 businesses valued above $2.5 million successfully finds a buyer?

That's a concerning figure for business owners, especially those looking to capitalize on their investments.

However, several successful strategies can influence the likelihood of a sale. In this article, we'll guide you through how to sell a business, boosting your chances of a successful sale.

TL;DR - How to Sell a Business

If you want to sell your business for the highest price possible, follow these steps to maximize your profit. We'll explain each one in more detail as you read on.

1. Know your why

2. Maintain financials

3. Understand and create your buyer list

4. Allot time for buyer discussions

5. Create your preferred timeline

6. Get a business valuation

7. Surround yourself with a great team

At Exitwise, we use our vast global network to connect you with seasoned M&A professionals who specialize in your industry.

Our team supports you throughout the process, from initial valuation to a smooth post-closing transition. Get in touch with our team to get started!

How to Decide When to Close a Business

With 75% of business owners looking to exit their business within ten years, these steps can help you recognize whether it's time to close:

1. Evaluate Financial Performance

Poor financial performance is one of the clearest signs that it may be time to close your business.

Take a hard look at your cash flow, profit margins, and debt.

If your business has been operating at a loss with seemingly no clear path to recovery, then maybe it's time to consider closing it.

Conversely, if your business is profitable, with growing revenues and a strong customer base, you're in a prime position to close your business at a premium.

2. Consider Market Conditions

Closing your business in a period of growth can be a wise decision as it attracts more buyers. 

But if you're noticing signs of a downturn, it may be wise to act quickly and close your business before further devaluation.

3. Determine if Your Goals Have Changed

Sometimes, closing a business isn't just about finances or market conditions. Your personal goals may have shifted, leading you to reassess your priorities.

If managing the business no longer aligns with your long-term vision, it might be time to consider an exit.

Business Liquidation Methods

Various liquidation methods are available for businesses, depending on the situation. 

Below, we'll discuss the types of liquidation methods and the events that typically trigger them:

How to Value a Business to Sell

Business valuation is often tricky, as it involves financial metrics and considers potential for growth and market conditions.

These are some valuation methods to take note of:

Book Value

The most straightforward method of determining your business's value is through its book value. This method calculates its value based on its assets minus liabilities, often found in the company's balance sheet.

However, there are many nuances to business valuation that the book value doesn't cover, making this method unreliable.

Discounted Cash Flows

Another way to determine your company's valuation is to use discounted cash flows (DCF). 

It's the process of estimating your business's worth based on its expected cash flows in the future. This method only works for businesses with predictable cash flows.

Market Capitalization

This method calculates your business's value based on the total market value of its outstanding shares. 

Simply put, the market cap is calculated by multiplying the share price by the total number of shares.

Enterprise Value

To get the enterprise value of your business, add your company's debt to its equity and then subtract any cash not used for business operations. 

It's a reliable measure to evaluate the entire company and essentially a modified version of the market cap, as it considers debt and cash.

Present Value of a Growing Perpetuity Formula

This formula values a business with the assumption that cash flows grow at a constant rate. 

It's used for companies expecting stable growth. 

EBITDA

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) focuses on a business's profitability before considering non-operating expenses.

This provides a clearer picture of your company's performance. It's often used to calculate a business's value through multiples.

Rule of Thumb

The rule of thumb business valuation method is an acceptable way to estimate a business's worth by applying a specific multiple to a particular financial metric, such as revenue or earnings.

While not exact, it's a good starting point for valuation discussions. Though it may lack the accuracy of more detailed valuation methods, it can be used for quick assessments.

Pro tip: To get a quick estimate of your valuation, use the Exitwise business valuation calculator. Just fill out the required information, and our calculator will give you a rough estimate to get started.

Checklist for Closing a Business

Closing a business involves a systematic approach to ensure obligations are met, and the transition is smooth. 

This checklist covers the main steps to follow before closing your business:

1. Notify customers and resolve remaining obligations.

2. Collect outstanding accounts receivable.

3. Sell or donate inventory.

4. Inform and pay employees their final wages.

5. Notify creditors and settle debts.

6. Terminate your lease with proper notice.

7. Liquidate business assets.

8. File final tax returns.

9. Close business bank and financial accounts.

10. Dissolve your business by filing dissolution forms.

How to Sell a Business for Top Dollar

To maximize business value, you must take the following steps to effectively prepare for the sale:

1. Know Your Why

When you start the process of selling your business, an interested buyer will want to understand your motivation behind the sale. In preparation of that conversation, it’s best to know how you’re going to answer that question. Are you selling your business because you want to retire? Do you want to shift your focus to another business or project that’s more interesting to you? Do you see benefits in a deeply strategic partnership that can drive incremental growth? Do you want to sell, but are more focused on maintaining the company legacy that you've created? There are no wrong answers to this question but certain answers will likely increase your buyer pool and drive up your sale price. Regardless of your answer, having a well thought out response could mean the difference between a successful sale or failed M&A process.

2. Maintain Financials

A major reason why many businesses fail to sell is weak financials. Before you sell your business, answer the following questions:

• Have you maintained accurate and up-to-date financial records?

• Are your financial statements clear and organized?

• Do you have a solid history of profitability or consistent revenue growth?

• Have you minimized outstanding debts and liabilities?

If your answer to these questions is yes, you are in a great position to move forward with selling your business. Strong financials attract buyers and help you sell your business for top dollar.

Having your financial documents prepared according to the generally accepted accounting principles (GAAP) can also paint your business in a positive light. So, it helps to work with a CPA to conduct financial audits and reviews.

3. Understand and Create Your Buyer List

An important, yet far more challenging step in the process, is identifying your potential buyer list. There are typically three groups of buyers looking to acquire businesses - strategics, sponsor-back strategics, and financial buyers. There is also a fourth option that somewhat rare, yet growing in popularity - Employee Stock Ownership Plans, also known as ESOPs.

Strategic buyers tend to buy and then incorporate companies that are often competitors, suppliers, or customers of their firm.

• There will be a significant emphasis placed on strategic and operational fit

• Real synergies may lead to higher purchase prices

• Confidentiality is a larger concern since proprietary information may be shared with competitors

• The seller’s management team, post transaction, may not have the same opportunity compared to a financial buyer

Sponsor backed strategic integrations with platform companies, purchased with sponsor equity and bank debt, can typically drive the best sale price. This type of acquisition can also offer the seller’s management team an opportunity to participate in the economics of business when it is sold again down the road.

• Hybrid buyer – best of both worlds

• Strategic benefit coupled with financial and operational support

• Opportunity for a "second bite at the apple"

Financial buyers (e.g., Private Equity, Growth Equity, Family Offices, etc.) are in the business of realizing a return on their investments within 5-7 years with a sale or an IPO. Because these buyers have fundamentally different goals, they will likely approach the sale in very different ways.

• They are driven by financial returns with a focus on risk related to cash flows and growth

• The seller's management team, post transaction, will play a critical role and will be a focus for investors

• Expect to present a detailed organic and inorganic growth plan

• A successful marketing process to a financial buyer requires in-depth pre-sale financial, operational and strategic analysis

• Family offices are able to hold investments for a longer time horizon

Employee Stock Ownership Plans (ESOP) are trusts that are set up to purchase shares of a company for the benefit of its employees. ESOPs can be a good option for business owners who want to sell their businesses to their employees. There are a number of reasons why a business owner might choose to sell to an ESOP, including:

• Employee retention: ESOPs can help to retain employees by giving them a stake in the company.

• Tax benefits: ESOPs can offer tax benefits to both the business owner and the employees.

• Retirement security: ESOPs can provide employees with a way to save for retirement.

With all of this in mind, knowing the type of buyer who is most likely to be interested in your company can help you set up your business in a way that will be the most appealing to them. It can also impact factors such as your timeline and structure for the sale. As an extreme example, you are likely to prepare very differently if you plan to sell to a family member or a long-time employee who is interested in buying the business, versus selling to a strategic buyer looking for product efficiencies and new customer opportunities.

You can even sell your business to a competitor.

4. Allot Time for Buyer Discussions

When selling your business, expect buyers to request time for due diligence to evaluate your records and the totality of your business. 

Here are some actions to take: 

• Meet prospective buyers and stakeholders to reinforce confidence in your business's stability.

• Acknowledge and address any weaknesses.

• Be open to questions and requests for information.

5. Create Your Preferred Timeline

Now that you've contemplated your reasons for selling and understand who your potential buyers will be, the next step is to establish a realistic project timeline. You should leave plenty of time to gather all your important documents and set things up to make the transition as easy as possible for the buyer to evaluate your business.

This process might include strengthening your management team, identifying and expanding your customer base and improving your financial records. To allow enough time to make these changes, it’s ideal to start preparing for the sale of your business a year or two in advance. Once you’ve started this process and know the items you're looking to improve, it's far easier to work towards a target date for selling your business.

6. Get a Business Valuation

To get an idea of what you may be able to sell your business for, you should get a business valuation. When you get a valuation, a business appraiser will use a formula to determine the current or projected worth of your company. Some of the factors that an appraiser will consider include the market value of your company’s assets, the management of the business and the prospect of future earnings.

7. Surround Yourself With a Great Team

At this step, it’s time to decide on the best type of advisor to help you sell the business. This decision can depend on your targeted buyer. Even if you’re selling your business to a family member or a trusted employee, you need an experienced and industry specialized, M&A advisor or investment banker to assist you in each step of the transaction.

Using an investment banker or M&A advisor will save you time and hassle. You can talk to your M&A expert about your expectations and let them handle the details while you focus on keeping the business running. Advisors can also help you keep the sale quiet, which you might want if your employees aren’t aware of the sale. When you use an investment banker or M&A advisor, you will likely have to pay them a commission on the sale of the business. However, with the experience and buyer relationships that these M&A experts bring to the table, they can help you get the highest price for your business, which ultimately benefits you financially.

Exitwise makes selling your business simple, and a significant part of that is connecting with an expert M&A team. We carefully select our team of professionals to ensure you achieve the highest possible exit value. Reach out today to discuss your options!

Things to Consider When Selling a Business

Selling a business demands considerable time and planning, with average estimates indicating it can take around ten months to achieve a successful sale.

Before proceeding with your transaction, take these factors into account:

Price

Your selling price will determine the success of your transaction. It should reflect the business's fair market value while also taking into account its financial performance and assets. 

A well-researched valuation will attract serious buyers and maximize your return.

Lifestyle Implications

Consider how selling your business will affect your lifestyle. There could be potential changes to your income, daily routines, and your professional identity. Reflecting on these aspects will help you prepare for life after the sale.

Also, think about your potential involvement in the business once after the sale. Do you intend to continue leading the business or completely withdraw? Your choice will significantly impact the company's trajectory.

Company's Future Value

Evaluate your company's future value beyond the sale by considering growth opportunities, industry trends, market position, and other competitive advantages that make your business more desirable to buyers.

Terms of the Deal

Pay attention to the terms of the deal, including payment structure, contingencies, and any involvement you may have post-sale. 

Negotiate favorable terms to ensure a smooth transition and overall success of the sale.

M&A Explained: Frequently Asked Questions

Here are some commonly asked questions about selling your business:

How Do I Know If I'm Ready to Sell My Business?

Here are some common signs that it's time to consider a sale:

1) You’ve spent years building up the business, and a strategic partner (client, competitor, vendor) has suggested that your business is a perfect acquisition target.

2) The business is doing well, but it has grown into something beyond what you're able to manage day-to-day. You'd like to find the right partner to help take your business to the next level.

3) You have other projects that you’ve been working on that you’re more passionate about, and you want to focus your time and money elsewhere.

4) You’re preparing for retirement and want to financially reward yourself for years of hard work and sacrifice.
5) You've talked to other entrepreneurs and founders that have sold their businesses, listened to podcasts discussing M&A successes and failures, and educated yourself on what a mergers and acquisition process will likely entail.

How Do I Find Qualified Buyers For My Business?

Your M&A expert will be invaluable in finding potential buyers. They will use their trusted private networks and relationships to make these connections for you. As those contacts indicate interest, your M&A expert will help you determine the right buyer for your business.

Should You Sell Your Business or Consider Outside Investors?

If selling your business doesn’t feel quite right, you may want to consider outside investors instead. The right option depends on your unique company strategies, your interest in retaining partial ownership or rolling equity into the buyer's company or platform, and the limiting factors that exist in your industry or sector.

If you’re ready to say goodbye to your business entirely and move on, selling it might be the right move. But instead, if your business requires incremental capital to drive needed growth, it may be time for private investors to enter the picture. Like any financial transaction, when considering outside investment be sure to retain experienced professionals to educate you and properly support the process.

Conclusion

Before selling your business, prepare by understanding its true value, maintaining strong financials, and identifying potential buyers. 

Additionally, surrounding yourself with a qualified team is essential for maximizing your sales outcome.

To sell your business for top dollar, connect with Exitwise today. Our experienced professionals will help manage and assemble your dream team of experts so you can achieve the highest possible exit value. With our extensive global network and industry expertise, we're ready to assist you throughout the entire process – from start to finish.