When is it too soon for preparing a business for sale? Is the buying stage too early? Perhaps not.
A wise lawyer once told me to always know how you are going to get out BEFORE you get in. How can the buyer possibly know this when the ink is not even on the paper, let alone dry?
One of my personal criteria for buying a business is understanding what the next generation of the business is, at least. For me to settle for the status quo is way too scary. Of course knowing the status quo can sustain the business for awhile is comforting, though some don’t require that. The latter contingent are willing to invest in a distressed business because they see through rose-colored glasses and are comfortable with the great opportunity.
The usual financial consideration used when deciding to buy a business is whether investing in the business will earn more, or at least the same, than you would from another investment AFTER paying yourself an equitable wage. Most market investors are betting on some combination of interest, dividends, and growth.
It is the growth part that is the subject of this blog post. Yes, buyers should be thinking of the growth part. Is it important to them in the long run? Elderly folks are not so interested in the growth part of their market investments. However, most business buyers are not elderly. They are young individuals or other companies and the business can provide not only the annual income but growth as well. This growth is what the rose color glasses folks referenced above are counting on as well.
At some point, either the owner or their estate is likely going to want to transition the business. The buyer should consider this in the buying phase, at least to some degree. Is s/he going to build the business for transition to children and what will the transition look like? Is the owner going to retire and sell the business, needing the funds from sale to support retirement? Is the owner planning to build the business for three years, sell it high and then invest low in a new business?
How can the buyer evaluate for selling or transitioning the business? If more familiar with the stock market, start there. What is the growth and annual return you expect from your market investments? What salary do you deserve for running the business? Now forecast the financial performance of the for-sale business starting from recent performance. Consider in your calculations expectations for change and improvement you anticipate. Don’t forget to subtract the wage and other personal charges you will add to the business expenses. Look into the crystal ball of outside influences…the economy, the industry, competitors…make adjustments.
Voila! You have 1) annual return and 2) a basis for determining your value at sale in the future.
Obviously you can not get all of this absolutely right but do take the time to consider it. Use a professional to help you.
Want to learn a whole lot about forecasting? Go here: http://www.statpac.com/research-papers/forecasting.htm OR
http://www.associatedcontent.com/article/55014/business_forecasting_methods.html?cat=3
Is that WAY too much, then make it simple up front, use it in making your purchase decision, and after buying the business, never stop forecasting.
Just as you might monitor the stock investments you make, looking to the future, you want to be monitoring the business, looking to the future.
Another wise person, an accountant, once told me looking forward is far more important than looking back. Use the 80/20 rule here.
How you prepare in advance for exiting a situation?
