Deciding to sell your business is a big deal. In fact, it’s likely to be the biggest financial transaction in a small business owner’s life.
Many business owners operate under the assumption that they will operate their business until retirement, but things can change. Too often these changes come via unforeseen circumstances such as illness or disability. That’s why it is imperative that every business owner have an exit strategy. You want to make sure you have a way to get the money back out.
Sell when profits are showing (especially if you have had some ups and downs)
Some people do this by paying themselves a large salary and bonuses, regardless of the company’s actual performance. That strategy may be fine, depending on your individual circumstances. Just be sure you’re not pulling out money now that you’ll need later. Plus, if you are paying your self too high, but the company is not showing healthy profit because of it, then make an adjustment so that the company has a higher value (net profit), not just your wallet! Even though you are told to not show profit for income tax savings, it can hurt your selling price greatly.
So watch self over-compensation and draining company profit. Show company profit on your income tax returns for two to three years for best results. Otherwise, timing me not be right for you unless you have other reasons to get out from under your business now.
Waiting too long means you risk closing your doors with little to nothing.
Some entrepreneurs simply decide to call it quits, to close the business doors and call it a day. It’s easy, there are no negotiations involved, and no worrying about transfer of control. But what a waste! At most you get the market value of your company’s assets. Things like client lists, your reputation, and your business relationships may be very valuable, and liquidation destroys them without an opportunity to recover their value.
The more common, and better, exit option is to sell the business. And the best time to sell is when the company is doing well and the industry is flourishing and next year looks like it’s going to be even better than this year.
You’ll want to keep an eye on developments in your industry and the economy. Use market trends and tax policies to help guide the optimal time to sell because they can impact the availability of bank financing for potential buyers, but the bottom line is that your best option is to always operate your business as if you are going to sell it soon.
It bears repeating, the best time to sell your business is when the company is doing well and next year looks even better than the current one.