Sell or Buy a Business? – Learn the Value System first!
Before you begin your business buying or selling search, lets dive into the methods of valuing a business.
This examination, will help ease any questions you may have, or answer some that you were not even
aware of. Regardless, business valuation is an important area to review, so lets begin!
Sell your Business – Business Valuation Process
The value and proceed numbers will differ from both buyer and seller.
The value of the business will most likely differ from the proceeds a seller should receive.
The terms would affect the price, as with many transactions are done on a retention basis.
This means that the final price is not yet established. This will occur once the earn out period is complete.
If you’re wondering, when attrition will occur, it will.
This number multiplied by the commission earned, can be less in amount if paid over time.
This is because, time is a component within the earned equation.
Another factor to consider during the valuation process is that of taxes.
I know, the dreaded 5 lettered word in this case.
Business Buying & Selling Tips
Taxes, yes taxes, are the next subject of conversation during the sell or buy of a business.
Taxes, depending on the type of business entity you are classified under, can mean different things to different entities.
For example, if the transaction is the sale of assets from a “C” Corporation,
proceeds could be taxed twice, first through corporate than through the personal channel.
If you are looking to avoid the double tax scenario, then you can choose LLCs, “S” Corporation or Partnerships.
This way, under these business entity classification, you are only being taxed personally.
You want to make sure your agency has been set up correctly from the frame up.
Check with a good CPA adviser if you are unclear about this area of discussion, because,
getting it right early on from a business start date, can save you tons later down the line.
OK, we have all heard it in business, “timing is everything”,
but what exactly does it mean according to the world where you would sell your business.
Timing plays a huge role in this phase!
But this phase should be divided into two sections. One personal, and the other business.
The personal phase of decision time comes with your ready mindset to sell.
This is where you have answered every question that could have possibly come to mind.
This is an important step in the process of making the move to selling your business.
For example, if you are in the thinking stages, you are looking at all your
other investments, such as life insurance policies.
This is because, you want to make sure you are not tapping to early into any funds,
risking early penalization fees or extreme deductions if pulled out too soon.
So, after times sensitive areas have been address, you will start looking at the
hot topic question, “will my business sell in this current market?”.
Ready to Sell? – Business for Sale
This really is the bottom line. This is when you are looking at current market trends,
assessing your industry compared to other similar markets.
Checking on recent sales in your industry or niche market,
and factoring any current events or trends is a must.
This is the point where you have crossed over to the second phase of the ‘timing process of a sell”,
which is passed from the personal stage and on to its business counterpart.
Phase 2 – Business Time Consideration
With this phase, you are looking outside of the basic options of selling your business.
From mentally making the move to sell, to choosing the right
business broker are all within your control and reach.
However, the timing of current and past market trends, to looking at detail
industry reports of the current political climate, are all outside your scope of control.
It is not as though you can fire the market trend, and incorporate
a new industry report when you see your company lose stock value.
Therefore, it is important to understand what to look for in the marketplace
when it’s hot, and learn when it’s the right time to sell.
As you know, timing is a crucial component with most sells.
So, we are going to look at the importance of time when selling your business.
Tips for the Marketplace of a Sell
Even though you cannot control the actual marketplace,
you can recognize control over a small window
of opportunity through the following:
- Understand the trends of a hot market,
- Ensure that you do not sell your business until the market gets hot.
- Putting your business on the market to soon or too late can both have detrimental effects on your bottom line.
- Therefore, it is crucial to watch the market long before putting it on it, and up for sale.
- To have discipline and self-control when it comes to the market being hot is another feature of self discipline.
Having discipline in this area will improve the amount you receive on your final sale.
You will want to incorporate a little patience in as well.
This will be the only control you need for a successful transaction.
Active Market Search
During an active Mergers and Acquisitions Market or M&A,
your deal will close faster with a higher value than in a soft market.
This is basically common sense, but if you don’t understand what to look for in the marketplace,
you may just miss potential indicators.
These indicators exist to show you the window of opportunity you need to sell your business in.
The economy could take a downshift, with the unemployment rate soaring,
which can all effect the financial strength of the market.
Any deterioration in an active market, will result in reverse effects.
Instead of a fruitful market, you are now looking at a declining or
contracting market, and in some extreme cases.
Therefore, having a good political an economic view of the industry
and marketplace our business is in, is important.
It will prepare you for every stage of the sale.
Bad Market – Mergers & Acquisitions
So, as you can see, getting your sell in before the market shifts are top priority.
This is because during a bad Mergers and Acquisitions market, the exact opposite happens.
It becomes much tougher to sell your business.
One day your business can have a multitude of interested buyers, to in a weak market, nothing
or no interest at all. This has happened countless times, which is why you must react
during a hot market and get out before it turns.
We are not discouraging the sale of your business during a downshift, but for top dollar
value and a fast turnaround, a strong economic market is when to pull the trigger on a sell.
Identifying Financial Matters
The good news is, you can identify a good time to sell.
This is because M&A activity is closely parallel to the business cycle.
The business cycle refers to fluctuations or shifts in the economy.
It is defined by economic periods of expansion and periods of contractions.
Contractions are also more commonly known as recessions.
So, during hot market trends, the periods of economic expansion are up.
So, when you are looking to pull the trigger, watch when the business cycle is expanding.
During these periods of expansion,
you will see the unemployment rate drop or become very low.
Also, corporate sales and personal income are on the rise.
These two signals also work together interchangeably.
When people are making more money on their paychecks,
feelings of security are up, therefore spending increases.
When spending increases, so does corporate sales.
So, you can see the obvious spin cycle of these two components.
Now, when people or economic talk occurs, consumers, spend more of their money during these
periods of economic strength, so, the stock market is also affected.
This effect is good of course. It only increases during these periods as well.
Now, during recessions or contractions of the economy, the opposite happens.
Unemployment rates are on the rise, people are getting laid off,
and the market takes an immediate impact.
The stock market will start to decline, and corporations
will discuss any internal changes on the horizon.
Corporate Infrastructure of Change
We all know that the internal infrastructure change of a
corporation always involves downsizing of the labor market.
It is usually the first area where corporate cutbacks are taken from.
So, the company will discuss how they will restructure
the business format during these economic downturns.
Unfortunately, if you are looking to sell your business during this period, hang on tight.
It will not be a smooth ride at all, for obvious reason.
Now, we are discussing these economic transitions as though they are easy to do.
There are many great minds who have committed their entire existence to the study of this market.
We are talking, many decades of observation and study,
and still they have learning information to share with the public.
So, do not expect to understand all the different moving parts involved in such a complex and intricate process.
Market Value of your Business
These are just obvious statements to show you that timing can,
and will influence the sale of your business.
This is just to make you an informed and aware seller,
and to maximize your bottom line during a sale.
If you know the value of your business, and are in position to wait the market out until you reach
the number you want, then you are in better financial shape.
This is because the market can be unpredictable,
especially when it comes to its future results.
Just make sure you are calculating your long-term
rate of return if you are considering this option.
Business Market Health
Now, if we are discussing M&A Market timing, you do not need the same level of precision
as you would with the overall health of the economic market.
You also do not need to know how to predict the future market trends or conditions.
All you truly need to know is, whether the economy is in an expansion mode or not.
It really does not matter if the arrow for the market is going up, down, sideways or no way at all.
You do not need to know when the market is peaking during the expansion stage.
The only thing you need to address is whether it is expanding in some way.
It would be a difficult feat to spot both peaks and bottoms of a cycle.
It is no different than you are timing the stock market.
Identification of a Potential Economic Expansion
As we mentioned, it would be difficult to try and predict any markets so, instead,
learn some of the markers that can point you in the right direction.
This advice will better serve you once you get to the decision-making phase.
So, even if economists and financial experts argue over whether the economy is either expanding
or contracting, the point to make note of is,
that these observations are made during transitional periods.
So, the point of this statement is, it’s the identifying markers
that people need to make during this transition of time.
If you can identify the markers or indicators during the core
transition of an expansion or recession, then you are one step ahead of the game.
This is because you will understand the financial climate of the
economy from a seller’s perspective if you’re in the market to sell.
This is can help tremendously if you are in the market to buy a business or company.