🔒Avoid undervaluation: How to sell your business the right way

Many business owners struggle to sell their businesses when they decide to pursue other goals in life. One of the main reasons for this struggle is the lack of knowledge about the business selling process, which often worsens their exit options, leading to an undervaluation or even a shutdown without a proper exit. Knowing what, when, and how to exit a business is important to be future proof and protect against undervaluation.

What is a business exit?

Just like selling a product or service, in a business exit the owner receives a price, often called the purchase price in the mergers and acquisitions space by transferring the business risk to the buyer. There are several ways to structure a deal in M&A, but the goal is the same: a successful transition reflecting the value owners have built.

Meet Mr. Oliver: A business owner ready for change

Let’s walk through an example. Mr. Oliver inherits his family restaurant with $10 million in annual revenue. However, he wants to pursue building an AI-based product and plans to sell the restaurant, since his aging parents can no longer manage it. This illustrates how life goals and timing often drive the decision to sell.

When is the right time to sell a business?

This crucial step involves careful scenario analysis, both art and science, often best guided by the right advisors. Mr. Oliver must consider:

• Is the economy favorable for buyers?

• Is the restaurant industry growing or declining?

• Are local competitors increasing?

• Is the business facing any operational challenges?

Oliver could still sell his business without assessing the above, and many sellers do the same. Why? Two reasons: lack of time and lack of awareness. The right advisor analyzes overall economic, industry, and company performance to identify the best time to sell. Even a well-performing business can be undervalued if the timing is wrong.

How to sell a business the right way

Planning in advance helps the process to be smooth and effective. Working with the right advisor helps create a successful strategy to sell with an attractive valuation. So, how far ahead should Mr. Oliver plan to sell a business of that size? It is better to plan at least six to 12 months ahead.

Here is what Mr. Oliver needs to do:

• Clean and organize the financial and business records: Cleaned financial statements and organized documents reduce costs.

• Hire the right advisor: Depending on the size of the business, this could be an M&A advisor, business broker, or investment bank. They guide the overall process and position the business strategically to buyers.

• Financial due diligence: It is a key process, typically provided by public accounting firms or outside consultants to issue a Quality of Earnings report. The bankers/brokers use these QoE reports in CIM preparation.

• Prepare a Confidential Information Memorandum: The advisor works with Oliver to create a pitch book outlining the business’s financials, operations, and value drivers, shared only with serious buyers.

• Go to market: With timing, financials, and documentation aligned, the advisor takes the business to market, identifies buyers, and negotiates offers.

Final thoughts

• Do not wait until you are forced to sell. Start planning early.

• The wrong timing can devalue your business, even if it is performing well.

• Collaborate with experienced professionals. Don’t go alone.

• Financial transparency is critical. Clean records = better offers.

To conclude, selling a business might sound overwhelming, especially for small and medium businesses, but working with the right advisor and asking the right questions will greatly help in achieving goals and get the price the business truly deserves.