After putting the time, effort and money into opening your business, selling it can be a difficult decision to make. And yet, every year, thousands of the 30.7 million businesses in the U.S. are sold. For some business owners, selling can pave the way to new opportunities or a decrease in stress. Others, like the 7.5 million business owners who may be forced to close their doors in the wake of COVID-19, may find that selling represents a logical way to cope with financial issues.
The decision to sell your business can be deeply personal and isn’t always an easy one to make. If you’re on the fence, here are five things to consider.
5 reasons to consider selling your business
You’re suffering from burnout
Running a business can be stressful, but if your stress continues for a long period of time with little relief, then you may be facing burnout, a condition in which prolonged stress negatively affects your physical and mental well being. Professional burnout can affect anyone, but it’s common among entrepreneurs — many of whom are spread thin and face an increased amount of pressure to perform.
Burnout-related stress can be caused by several factors, including limited access to (social and financial) resources, skills deficits, heavy workloads, conflicting roles and even role overload. As stress builds, business owners may become more cynical, irritable or impatient. They may also experience decreases in motivation and focus or have trouble finding satisfaction doing what they once loved.
Equally if not more concerning is the physical toll that burnout can take on the human body. Those suffering from prolonged stress can experience fatigue, insomnia, high blood pressure, heart disease and Type 2 diabetes, among other ailments. The health consequences of professional burnout have become so well documented that in 2019, the World Health Organization (WHO) included it in the 11th revision of the International Classification of Diseases (ICD-11).
Selling your business can certainly help you recover from burnout, but if you’re not quite ready to sell, there are other ways you can improve your quality of life while maintaining ownership of your business. For instance, delegating tasks, seeking the support of friends and family or even identifying ways to practice self-care (e.g., vacations, exercise, etc.) can help reduce your stress levels.
It’s time to retire
If you’re nearing retirement, the benefits of selling your business can be two-fold. Stepping back from your role as a business owner often means increasing the amount of time you have for personal fulfillment, whether that’s spending time with family, traveling or simply enjoying life without the stressors of daily business operations. Selling your business may also help finance retirement goals.
If retirement is driving your decision to sell, your next step should be to prepare a succession plan, or a step-by-step guide that outlines what should happen to your business when you or your partner(s) retire(s).
A typical succession plan includes several parts, including a valuation of your business and potential selling price. It can also name an individual who will take over after you retire, outline how the retirement will affect business partners, provide a timeline for retirement and even allow for the transfer collection of standard operating procedures (SOPs). Places with high rates of family-run businesses, like Phoenix, AZ, can also clarify which heirs, if any, will fill your role as well as a date as of which the plan can go into effect.
You can’t dig yourself out of a financial hole
Business is filled with ups and downs, and when revenue slows or other financial issues arise, business owners may turn to small business financing options like loans, credit cards and factoring services. Unfortunately, those measures aren’t always the best means to a financially healthy end. If you remain in the red, or if interest and payments are pushing you further down, selling may help you get out of debt and avoid filing for bankruptcy.
Though selling may be worth considering, it can also pose a risk for business owners who are coping with debts — especially if those debts exceed the value of their business assets. Finding a buyer willing to purchase a struggling business can be challenging. And, even if you do sell the business, you may find that you’re not free from your financial obligations associated with it. Even if you no longer maintain ownership, creditors can still hold you personally liable for any business debt you signed off on while in control.
The perfect offer comes along
The decision to sell your business can also be a strategic financial move, particularly if the perfect offer comes along. Periods of low interest rates, a strong economy and an upward industry trend that will mark your business as valuable to investors can all lead to “perfect” timing. Offers from competitors can also come along, and selling can be a lucrative decision that helps you move into the next stage of your life.
Before you sell or evaluate any offer, make it a point to determine exactly what your business is worth. A valuation can help you determine if an offer really is perfect and if it makes sense to sell. There are three primary ways to conduct a valuation — market, asset and income — and the one you choose depends on your business.
- Market-based valuation. This method compares your business to other similar businesses, specifically those that are similar in size, location and structure. A market-based valuation would be best used by any small business that can rely on information from the sales of similar companies.
- Asset-based valuation. This approach uses the net worth of your business assets to determine value. The total value is determined by comparing business assets with non-debt liabilities. Or, in some cases, this type of valuation may take into consideration both tangible assets, like equipment, and intangible assets, like the customer base or brand power. An asset-based valuation may be a good option for businesses with recurring clients, such as accountants and medical or legal professionals.
- Income-based valuation. This method uses your business’s earning potential over a period of time (e.g., 10 years) to determine its value. Startups or businesses without a history of revenue may find that an income-based valuation is a good option.
Either way, a valuation should play an important part in determining whether an offer is worth considering.
You’re Missing Trends
Consumer and industry trends can motivate entrepreneurs to open businesses, but they can also help business owners decide if it’s the right time to sell. That’s particularly true if you’re not physically, emotionally or financially ready and you’re able to adapt to business trends.
For instance, over the last ten years, e-commerce sales have risen, and today they account for 16% of total merchant sales. As consumers turn to e-commerce to fulfill their needs, brick and mortar stores that are not positioned to add an online shopping component may suffer. If market trends, like the reliance on e-commerce, continue to threaten your business and there’s no way to adapt, you may want to begin planning an exit.
Similarly, some industry trends or global changes can indicate a decreased need for a good or service. This sentiment is currently playing out as the global pandemic has hurt arts, entertainment and tourism-based businesses.
The value of trends and their impact on industries and consumers aren’t limited to external factors. Missing trends can also refer to your role in the company. If the needs of your business have outgrown your skill set, or if you’re no longer in a position to recognize trends and how they relate to your business, maintaining ownership may mean putting your bottom line in jeopardy.
After working so hard to get your business up and running, selling it can feel like a daunting decision. Before you sell, take the time to evaluate your options and determine whether it’s in your best interest — mentally, physically and financially.