There are typically two ways to attract a high multiple for your business. While one avenue focuses on the business itself, the other manner in which a high multiple can be achieved is via the sales process. While this particular channel won’t convert an average business into a high multiple business, it can provide an increased value when it comes time to sell.
Know when to sell
Few things are as important than knowing when to sell. But when, exactly is that? It’s actually pretty straightforward: You’ll know it’s time to sell your business when you identify positive trends in both revenue and earnings, and your analysis has determined there’ll be a continued prospect of growth.
That’s the key: prospect of growth. When you can demonstrate a solid prospect of growth, you’ll increase your chances of attracting a strong multiple. Of course, while future prospects are influential, they’re not the only determining factor in how your business is assessed. Your potential buyers are also keenly interested in your historical performance, or more specifically, they’re interested in seeing a minimum of two years of growth.
This ensures – to the buyer – that your growth isn’t some random spurt, but rather a trend. You have to be able to convince to your buyers that this growth was legitimate, representative, and not short-lived.
Since the selling process can take several months to complete, it’s inevitable that at some point your potential buyer will want to ensure your business is still on track. Having timed your sale perfectly, you shouldn’t have anything to fear, as your growth trend will remain consistent. If, however, you timed your sale incorrectly, a look at the latest financial month or quarter end could show that you’re underperforming from what you originally told the buyer.
That could result in a value revision or, perhaps, a structure change in the letter of intent which in turn will delay the sale.
Know who to sell to
One key takeaway from this is: the more options you have as a seller, the more power you possess. In other words, keep your options open as long as possible. You’ll of course want to construct a buyer list of solid potentials, and you’ll use your divestiture principal as a resource (as he/she knows the competitors who might make good buyers). Often times, direct competitors are excluded from this list for a host of reasons (they may feign purchase interest to gather intelligence, or they may only be interested in your customer base and will lay off your staff after the sale).
If you only have one interested prospect for your sale, you’re essentially left with two options. You can either accept that you have no leverage and continue to sell your business for a multiple far lower than you expected, or you can identify that you have no leverage and postpone the sale.
Know why you’re selling
Are you selling because you’ve spent your career building your company and have managed to make it run smoothly with or without you? Great, that means you’re in fantastic position to get as much cash as possible for your business, while also shortening the transition period.
If, however, you’re selling because you’re hoping to accelerate growth, then your best bet might be to partner with a financial buyer. These buyers will bring with them a wealth of resources designed to meet your goals. But keep in mind, this avenue requires you to stay with your business a few more years before the business will bring in the time of return you’re expecting.
When selling your business, make sure you’re still invested
In order to drive the multiple higher, you have to somehow connect and resonate with the buyer. You have to get them excited about your company. That’s a bit more challenging when you, as the owner, have already lost interest in your business and have moved on elsewhere. The best time to sell, and get the most for your sale, is when you’re still interested in the business (but, at the same time, when the business is no longer reliant on you).
Considering that the sales process can take several years to complete, it’s always best to start planning your sale as soon as possible. Positioning your business to be sale-ready will not only increase multiples, but in the meantime, it’ll help make your business run more efficiently.