When to Sell a Business: Clear Indicators It’s Time to Exit

It can be hard to know when to sell a business. There comes a point in our careers as entrepreneurs and business owners that we want (or need) to sell a business we’ve grown. 

We do so for many reasons – personal circumstances such as retirement, health issues, or the desire for a lifestyle change are top reasons. Some entrepreneurs also sell when they foresee market shifts that could devalue their business in the future. Sometimes, it could be because we feel like we’ve taken the business as far as we could have, and it needs new energy and ideas to continue growing.

Whatever the reason, when we reach this point we iron out what needs ironing with the business we want to sell, put up an ad for it, wait for the buyers, and hope for a successful sale. But nothing, especially not a business sale is ever that straightforward – and I learned this first hand when I was selling a legal CRM product before I started Doorloop.

Selling a business is a tricky matter for business owners. That’s one of the many things selling a business taught me. You must account for every single detail, consider the timing, and, most importantly, ensure that your business is prime for selling. If not, then you will sell yourself short on the negotiation table.

Admittedly, it’s a delicate process and there are a lot of external factors involved. Given that you need to balance the timing and the current value of your business, it’s one of the toughest calls you’ll ever have to make. But we’re hoping to give some guidance on that with this article.

Below, I’ll be sharing some things I did to ensure that I maximize my earnings from selling a startup.

5 Signs Your Business is Ready for Selling

When we say a business is “ready” for selling, we’re not only referring to the logistics and administrative aspects of a business for sale. The sales process, in the context of its readiness for selling and stretching your gains from it, refers to certain optimal conditions and external factors as well as scenarios that signal the best time to sell.

These include internal considerations such as business profitability and cash flows, and external ones like market stability and demand. Ideally, you should observe all these factors before selling a business. In the effort to respond quickly to trends, however, ensuring two or three are considered is acceptable.

Now, let’s detail these factors below.

Your numbers are up and growing.

Up in terms of profits, and rising. If you’ve met your financial goals then this is the best time to sell if you want to maximize your earnings from the sale as it boosts your valuation and makes you an obvious purchase for a buyer.

This is exactly what we did with the legal CRM I co-founded. At its peak, PracticePanther’s numbers were continually growing as it served a huge gap in the legal vertical. Those factors combined made PracticePanther a high-potential business that quickly attracted a high-quality buyer.

Another thing I’d like to emphasize in PracticePanther’s case is the speed of selling it. With good numbers and impeccable financial records, you sell fast. Bad numbers, on the other hand, will take you a while to find the right buyers. This is critical because, the truth is, you never really know how long you’ve got until a good thing starts costing you.

For one, taking too long to sell a business risks lowering its value and it often leads to qualified buyers making sure they have a sound exit strategy should things not work out in their favor. Second, and more importantly, you’re in a race to survive. Fact is: 50% of small businesses will shutter in their fifth year, and one of the key reasons is running out of cash – aka, capital. In a survey of startup post-mortems (as of 2021), CB Insights found that 38% of founders had to shutter their startups because they ran out of cash in the long run. Business owners also choose to sell during financial peaks to fund other passions, repay debts, or because they’ve received an offer too good to refuse, indicating a perfect exit opportunity.

In a previous version of this survey published in 2016, the foremost reason for startup closures was market demand. This suggests that while we’ve gotten much better at identifying market needs (and subsequently developing solutions), the struggle for modern startups lies in funding.

Don’t wait until you can’t raise or manage your funding to sell and put your business up for sale while it’s performing. That way, you not only profit from it, but also ensure that your business thrives with optimal cash flow.

Market stability, and clear demand.

Unless you’re lucky enough to be in an industry that is little affected by seasonal changes in demand, then I urge you to sell when demand is high, and the market is relatively stable.

Market conditions tend to fluctuate depending on market trends. Market stability and demand are external, uncontrollable factors that affect your business value. DesignRush founder, Gianluca Ferrugia, who works with digital marketing agencies, echoes just as much.

Citing the heightened demand for digital marketing services, he explains that these companies tend to “get valued pretty well when [the] time comes to sell the agency.”

However, he warns that “valuation based on demand will still be weighed against market stability.” The best case scenario is that the market remains stable while demand for your product soars.

But that is rarely the case; demand for your product or service won’t always come with market stability. Their relationship isn’t exactly that correlative. Comparing the market for digital marketing services during and after the pandemic lockdowns, the Gianluca explains that, on top of other factors, “market turbulence makes some investors, especially if they are strategic buyers wary, and some more daring.”

He continues, “we saw this a lot during the pandemic. The growing investments in ad spending in a fair were the perfect sign for buyers to acquire companies. But those I talked to decided against it mainly because the industry is oversaturated with players, and the pandemic’s long-term impacts were just too hard to predict.”

So, when the rare chance that your the demand for your product is booming during a time of relative prosperity, you better act fast.

The business has outgrown you – or vice versa.

Any entrepreneur would be happy to see their business grow – I know I would. However, the sad reality is that sometimes, business growth far outpaces your capacity, or you outgrow your own creation.

These two scenarios are the most common reasons business owners tend to start considering putting their business for sale. The former puts you in a situation where you could burn yourself out by trying to keep up with limited resources. The latter, on the other hand, might leave you unstimulated or unmotivated, leading you to seek new opportunities.

In either case, the best resolution would be to sell your company as it will benefit both you and the business. For one, creating an exit plan and selling a business will leave it in the hands of new leadership and teams that can instill new life in it – growing it beyond your expectations.

Meanwhile, you can free up time and resources to allocate to new personal goals and professional pursuits.

You’ve found the right buyer.

Thriving businesses will attract good buyers like honey does to bees. When you’re attracting high-quality buyers or investors for your business, then this is a strong signal that your business is ready to sell. Yes, even when you didn’t mean to sell it, in the first place.

This happens because people are seeing the value and potential of your business – for good and bad reasons alike. Some will buy you out of the boxing ring, like a competitor. While some are looking to help grow your business, like venture capitalists.

No matter which kind of buyer you are facing, remember that it is still critical to evaluate your options carefully. The best buyer is the one whose motivations align with your purpose for selling the business – whatever it may be.

Additionally, here are some criteria you can consider adding on your list:

• Ease of negotiations. Is a potential buyer helping make the transaction flow easier or more difficult?
• Best terms. Who among your potential buyers are offering the best payment terms? Do these payment terms fit your financial decisions post-transition?
• Buyer’s reputation. What’s their buyer history based on previous deals? Are they a credible buyer? Consider also the cultural fit and vision for the business post-sale, ensuring continuity for employees, customers, and stakeholders.

Take a step back to assess if a buyer checks off your most decisive criteria, and above all: Know your true value, and don’t settle for anything less.

Loose ends have been tied up – legally speaking.

Finally, the last thing you need to settle so that your business is primed for a sale, is ensuring that there are no snags before a transaction. Legal snags, to be exact.

It would be naive to think that a buyer would neglect to do their due diligence before making a purchase. They will do it, and do so thoroughly. The devil is in the details, after all; every flaw uncovered is a count against the value and trustworthiness of your business.

In this aspect, it’s best to seek legal counsel so that you’re not missing any kinks that need to be ironed out and disclosed. Transparency is paramount to deals; a buyer could back out of a deal if they discover even a minor legal issue before you get a chance to disclose it to them.

Matthew Clark of Clark Law Office is no stranger to these kinds of consultations. As a personal injury lawyer who’s worked and won cases against companies, he receives requests for legal background checks on companies regularly.

He discloses that, often, these checks will also cover a company’s executives down to its employees.

“Buyers looking to acquire businesses request the most thorough background checks, especially when a deal is about to close. These could cover anything from a company’s legal history to the legal issues one of your tech staff once faced.”

He further reaffirms that even the smallest whiff of a previous legal issue could stir doubts about a deal. “Sometimes, it takes the smallest legal snags of one of your employees to scare them away,” says Matthew.

Even if you’re confident that your legal track record is spotless, it won’t hurt to consult with legal experts when preparing the documents for your sale. Enlist their help in doing the necessary background checks and document everything you need to disclose to a buyer. This level of diligence reassures buyers and can speed up the sale process by preventing last-minute hiccups.

It’s a tedious process, and it will eat up a chunk of your time. But taking the time to go through this will benefit both present and future deals.

Things to Do When Selling Your Business

After ensuring that your business is optimal for selling, it’s time to understand the things you should and shouldn’t do in the process of closing the deal.

Determine the true value of your business.

This is the first and most important step prior to selling your business, as it helps you determine the boundaries for negotiation with potential buyers.

In this step, you must conduct a comprehensive business valuation process. This includes assessing your financial performance, market conditions, and industry comparables.

Flippa’s  straightforward approach to calculating the sale price of a business is simple:  Multiply the Net Profit by the Multiple and then add the value of Assets. The formula should look something like:

(Net Profit x Multiple) + Assets = Business Value

Certain characteristics of business impact the choice of multiple in the equation. Businesses with hands-off owners typically warrant a higher multiple. Whereas companies whose owners actively contribute to operations tend to have a lower multiple.

If unsure how to move forward with business valuation, partnering with a broker is one of the easiest and wisest decisions. For those who want to conduct the selection on their own, consider the following criteria:

• Has deep market and industry understanding. This is essential from the business valuation down to the negotiation of the deal.
• They are organized and come prepared. Meaning they don’t cut corners when conducting due diligence, and work efficiently.
• Supportive and communicates openly. They accommodate your concerns, and give supportive, level-headed advice whenever necessary.
• Commitment to closing the deal. Brokers who understand what these deals mean to you will exhaust all efforts to find the perfect buyer.

Note, however, that the selection process takes time. If you’re looking to move things along faster, I suggest you ask experts to pair you with a broker.

Establish your ideal deal structure.

After you determine the value of your business, you must outline your expectations for the deal structure.

Some buyers can pay cash upfront, while some may opt for SBA financing, or other forms of payment terms. Here, we must balance being firm and flexible, in consideration of both our financial needs, and the ideal buyer’s capacity.

Consult closely with your business brokers and transaction attorneys in this stage. You will need their help in preparing key documents such as the Term Sheet, and Letter of Intent (LOI). For quick reference, I’ve linked useful templates for both below.

• LOI Template
• Term Sheet Template

Be transparent with your buyers.

Dominic Monn, the founder of Mentor Cruise, reminds business owners looking to sell: “Lack of transparency is one of the main reasons buyers back out of a deal. Needless to say, transparency and open communication is very important  to making key business decisions.”

That said, it should be obvious that maintaining open communications with buyers and other stakeholders during the deal is paramount.

In communicating with them, ensure that:

• Reports provide up-to-date and accurate information about your business.
• Communication lines stay open for concerns that need urgent attention.
• Main communication platforms are established for clarity and ease.
• Immediately and honestly communicate issues that arise during the deal.
• Hold yourself accountable for missteps during the process.

Maintaining transparency during deals is critical to fostering trust among current and future buyers alike. You wouldn’t want to start a track record for dishonesty in this industry.

Straighten out your paperwork and documentation.

This usually happens way before a sale happens. In fact, I would assert that effective recording and documentation of everything concerning your company should start from its inception.

Effective documentation proves useful during deals as you won’t have to scramble to get the necessary information to potential buyers. More than completeness, documentation should also communicate important information effectively.

Here are my three non-negotiables for crafting effective business documents:

• Explain using visuals. Whether it’s data charts for financial statements, or flowcharts for business processes, drive the point better with visual aids.
• Maintain your focus. Everything detailed in your document must align with the goals and objectives you’ve stated.
• Keep it short and direct. Get rid of the fluff in your reports; they will only obscure your message and confuse your buyer.

Monitor market conditions.

Your value at the start of the deal can shift later on depending on changes in the market conditions. Hence, it’s important that we monitor these vigilantly.

Market conditions will shift the direction of your value in only two ways. It’s either a.) your business value grows, or; b.) it declines. Both cases will likely result in negotiations for adjustments in the offer.

Ensure that you conduct negotiations professionally, while ensuring that you secure the best value. Here are a few tips:

• Stick as close to your initial valuation as possible. You know your worth. Don’t settle for less. A buyer that refuses to understand this may simply not be the ideal one for you.
• Separate selling price from asset price. Selling price is the value of your entire business, including assets. Asset price, on the other hand, accounts for the price of assets alone. Separating these will allow you to provide flexible offerings to potential buyers.
• Focus on reaching fair compromise. Especially if a buyer looks to be legitimate and sincere. This is because refusing to budge may cause strain in a business relationship you might want to preserve. In this case, it’s better to strive for a mutual agreement, rather than pushing for your way.

Broaden your buyer pool.

Cast a wide net to reel in as many potential buyers as possible. This gives you leeway to find the ideal buyer, while increasing the chances of getting the best possible deal.

Expand your demographic of buyers and consider different kinds of entities like individuals, private equity firms, and strategic investors. Having a mix of potential buyers also increases competition and gives you more leverage in negotiations.

The two best ways to cast this wide net are to:

• Hire a broker with a vast network of buyers. If a broker doesn’t have a vast network, on the other hand, they should commit to hunting down as many leads as possible.
• Put up an ad in a listing site. Websites like Flippa, which boasts the largest network of buyers, effectively broadens your buyer pool.

Final Thoughts

Recognizing signs like business growth, market stability, and heightened demand are critical signals that tell you it’s time to sell your business.

But bear in mind that selling a business is a complex process with much to account for so that you stretch your earnings from the transaction. Along with those, you must be thorough with executing the logistics of the selling process.

We acknowledge that it’s difficult, confusing, and that it can be one of the biggest challenges you face as an entrepreneur. It will take a lot of patience, and all the help you can get so that you’re not taking any missteps. Whenever necessary, enlist the help of professionals so that you can reach a decision that benefits both you and the potential new owner of your business.