No business venture is too small—whether you’re working on a side business in hopes that it’ll turn into your full-time gig in a few years or you’ve launched a successful company by the straps of your boots.
In fact, it’s those humble beginnings that make business owners like you the heartbeat of this country. But not every businessowner has the dream of starting and selling off business after business after business (and that’s perfectly okay). But knowing how to sell a business successfully is something you just might want to keep in your back pocket.
How to Sell Your Business
While you may not be looking to sell your business and take over as CEO or advisor of a giant corporation, it’s still good to know what might happen if someone approaches you with an offer to buy your business. And if that happens, there are just a few things you need to know: how to replace yourself well, how to determine what your business is actually worth, and how to make sure you sell it to the right person.
Keep the Books Squeaky Clean
Even if you have no intentions of selling your business, go into each day and each opportunity like you’re selling it tomorrow. Why? Because you’re running it like you’re going to be gone tomorrow. We know—this sounds weird. But trust us. By having the mindset that the business will be someone else’s tomorrow, you’re going to make sure everything is in order. Not only that, but if you run your business this way, you’re going to focus on building up your leaders and learning how to delegate. On the flip side, if you’re not keeping detailed and accurate records today, it’s going to be hard to review the books tomorrow (no matter who’s going to be doing it). Just look at the events of 2020 . . . if you’re out sick, who can you trust to run the day-to-day or keep the finances straight? Keep the books clean as you go and you won’t have to scramble to get things in order if you ever decide to sell—or go on vacation.
Know What Your Business Is Worth
What’s your business actually worth? Your business has been your dream and your “baby” since before you ever made your very first dollar. That’s why it can be hard to figure out how much your business is worth, knowing that your blood, sweat and tears went into getting it up and running—not to mention profitable. But those memories and long hours aren’t exactly going to help you calculate what your business is actually worth when it comes down to dollars and cents.
The key thing is to make sure you’re estimating your numbers in the right ballpark. You don’t want to undersell yourself, but you also won’t get too many bites from potential buyers if you’re selling your 10-day-old earring business for $5 million.
Here are the four most common ways to estimate the value of your business:
- Book value
- Capitalization rate method
- Market-based value
- Discounted cash flow
Also known as net asset value or assets in receivables, valuing your business at book value is a common way to get the very minimum that your business is worth. If you closed your business today, sold off all your inventory, collected on anything owed to you, and paid off anything you owe, that would be your book value. And while this is a common way to value a business, it’s not the best way. Why? Because you could make more—a lot more. But if you’re looking to close up shop quickly and move on with your life, this is the route to go.
Capitalization Rate Method
Capitalization rate, or cap rate method, is our favorite way to value a business. With the cap rate method, you’ll multiply your net profit by four or five (after subtracting your basic wages and the day-to-day operational expenses), giving investors a 20–25% rate of return on the business.
With this method, you’ll value your company based on what other (similar) companies are doing in the marketplace. What are they selling for? This valuation method is used often in the housing and real estate industries.
Discounted Cash Flow
What will your company do in the future? This method looks at what your company has done in the past and present to calculate what the business might be worth in the future. To do this, investors come up with a discount rate based on what their investment might be worth tomorrow.
Selling to the Right Buyer
Have an offer? Congrats! But before you start dreaming of sailing off to your retirement, make sure you’ve got the right person taking over your business. If this business is one you’ve built from the ground up, you might actually care what happens to it once you’ve signed on the dotted line. What does the buyer plan on doing with your business? Will they run it into the ground, or will they have what it takes to grow it and continue what you’ve started?
Every business goes through five distinct stages. Find out which stage your business is in with our free assessment.
Either way, finding the right buyer is key. Hint: It may not always be the first person who makes an offer.
Business can be hard—especially if you’re doing it on your own. But you don’t have to do it alone. Take the guesswork out of winning at business with a customized plan and online leadership training—that actually works. With EntreLeadership Elite, you can work through self-guided training, join an advisory group with like-minded businessowners, or get one-on-one executive coaching to dive deep into things like selling a business. Get started today and learn how to sell your business tomorrow.