When people start thinking about selling a business they usually first consider how much it’s worth. That’s important of course. But if you want to sell your company for maximum value the best way to do so is to talk to someone who has done it a couple of times . That’s why I rang up Jim Wang.
For those of you who don’t know Jim, he is the founder and creative genius behind the uber successful blog “Bargaineering”. Jim sold his site a few years ago and that sale set up him to become a serial entrepreneur. Needless to say, it was an extremely profitable transaction for Jim. I wanted to find out what steps he took to squeeze every last dollar of value out of the deal. Jim was very generous with his time and I can’t possibly do justice to his wisdom in this short post. But I did want to share some of the nuggets. Here are some excerpts I think you’ll find exceptionally valuable:
NF: Jim, what’s the biggest mistake people make when they sell their business?
JW: The biggest mistake actually happens much earlier than the moment they decide to sell a business. When someone is building a business, they often don’t think about the exit strategy. They don’t think about who might be interested in buying their business and what aspects of your business are the most appealing. Are they most interested in the number and quality of your clients? Or do they care about revenue? Or maybe they care about your firm’s intellectual property or other assets? If you can focus on building up those factors, the ones that matter, you can sell your business more easily and for more consideration.
From a tactical perspective, people often don’t optimize their business for the sale. Ideally, sellers should start shaping the company for a sale 2 years prior to the transaction.
NF: What does that look like?
JW: Well, in most cases, the concept is to maximize revenue and slash costs. So it would be wise to cut expenses if possible and do whatever you can do to increase sales. By doing this over a 2 year period, it looks organic rather than superficial.
NF: Lots of my readers are keenly interested in valuation. What are your best tips on knowing what to ask for a company we want to sell?
JW: Valuation is tricky… there are so many components. You never know what is most important to the buyer when it comes to valuation. Some people only look at assets. Others mainly care about the growth of the industry. Smart sellers take time to ask potential buyers questions to get inside their head. Obviously, the more research you do on your buyers the better off you’ll be.
NF: So I’m hearing you say that valuation is a function of the buyer and the industry – with an emphasis on really knowing and understanding your buyer. What other mistakes do sellers make?
JW: They rely on internet calculators. Calculators are wonderful but they can’t give you valuable personalized information when it comes to selling your business. They don’t have the flexibility and dynamic capacity to consider probabilities and changing cash flows.
NF: So what’s the alternative?
JW: Some people hire a consultant (which I think is smart) but then they just hand it off and fail to stay involved in the process. That’s a huge mistake. Sellers have to stay involved in the process if for no other reason than to defend the number the consultant comes up with. Also, by working with the consultant sellers better understand what’s happening in the industry in general and many times, with their own company in particular. Finally, by working with a consultant you learn from an objective and professional source all the things you can do to make your business more profitable.
NF: Let’s move on. Tell me more about mistakes sellers make when valuing their business.
JW: Before you take a step, be clear on the purpose of the exercise. If you want to value your business only because you want to get a business loan – don’t waste your time. The banks will do their own valuation. If you are preparing the valuation because you want to sell all or part of your business, run the evaluation from that standpoint. I say that because your business probably looks far different with you in it vs. without you in the picture.
NF: Who buys small businesses?
JW: I don’t have the data but my sense is that most small businesses are bought by other small businesses.
NF: I imagine that small business buyers have a huge concern about risk. They fear that once the seller is out of the picture, sales might implode. What can sellers do to alleviate that buyer’s risk and thereby increase the likelihood of a successful sale?
JW: Rather than allow a seller to claw back some of the sales price, sell the business at a “discount” but build in a “premium” if the company hits certain sales goals. For example, let’s say you want to sell your company for $1 million. Sell it for $750k instead but provide a $250k bonus if the company hits the goals. It takes some of the risk off the buyer and puts it on you. By doing this, the buyer gets some protection and you get the sale done. Win win.
NF: Thanks for the great tips Jim. I really appreciate the time you’ve spent with me today.
JW: My pleasure. Anytime.
Jim Wang is now working on Microblogger, an entrepreneurship blog that focuses on sharing his experiences building a seven-figure personal finance blog. You can reach him on Twitter, LinkedIn, and Google+.