If you are thinking of selling your business, should you be listening to your head or your heart?

13/10/2009 by info.

Well the answer is it is important to listen to both.

From purely an investment point of view you should hold the business if it generates more pure profit than the investment earnings from the sale proceeds.

So if you have a business worth £200,000 you should be asking your Independent Financial Adviser what return on investment he can obtain for you from your proceeds and compare that with the “pure profit” made from your business.

Pure profit is the excess profit over and above what you could earn from having a job running your business.

So for example:

Business Profits £45,000 less assumed salary £30,000 your pure profit would be £15,000.

Sale Proceeds £200,000 invested at say 10% would be £20,000 so it would be preferable to sell on an investment level.

Owning a business requires passion and a level of commitment, and a business owner should always sell BEFORE that passion dwindles, otherwise the possibility is that the profits and therefore value of the business will fall.

So when making the decision to sell your business, you should check your gut instinct and ask questions like does it feel right to sell? Can I move the business forward next year?

However sometimes, a potential buyer may not support your idea of the business’ potential. Typically, buyers will not pay for future potential, especially if it is not supported by historical performance.

Additionally you should be asking the following questions about your business as without these buyers would be thin on the ground.

· Does the business have a favourable track record of profitability and cash flow?
· Does the business have an attractive outlook for the future?
· Can the business continue without your day-to-day involvement after an interim transition period?
· Are there key managers who will go along with the sale and help the new owner with the transition?
· Does the business have unique assets that would be hard – or impossible – to replicate by a prospective buyer (e.g., an attractive customer base or unique supplier arrangements)?

It is these sorts of issues that should lead you to the right decision as to when you should sell your business.

Whatever your decision you should be taking advice first from all your advisors, your IFA, business agent, accountant as often your assumptions may be incorrect and may lead you to the wrong decision. I.e whether tax would be payable on the proceeds, and your proceeds would be less than you thought.

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