By Denis Jakuc
A sale is one of the most common ways to depart a business. Selling your business potentially allows you to retire or focus on other priorities, or to unload a struggling venture or one for which you have lost your passion. When you sell a business, however, you’ll need to make sure you carefully consider all of the factors that go into the transaction.
Identify your reason
Why you want to sell your business can influence how you approach the sale. Business owners sell because they’re ready to retire, to move on to another venture, or to have a family member or a trusted employee take over the business, as part of a well-planned exit strategy. Or, the reason can be unexpected, such as a dispute with a partner that can’t be resolved, or a sudden illness. Owners can also decide to sell if the business is unprofitable, which of course makes it more difficult to attract buyers.
Determine the timing
It’s realistic to give yourself a year or two to get the deal done. This also gives you time to make it more attractive to buyers who like to see:
- Growing revenues — if needed, jumpstart sales with new marketing promotions
- Growing profits from increased operating efficiencies
- A solid, diversified customer base, with no single customer representing more than 20 percent of revenues
- A major contract spanning a few years
- Trimmed inventories
Of course, if you’re selling because profits are dwindling or non-existent, you’ll want to sell as soon as possible to cut your losses.
Value the business
Determining the value of your business will help you price it correctly. It’s a good idea to hirea business appraiser who can provide a detailed analysis that will solidly support your asking price. A qualified valuation professional will review your business, including its competitive environment, sales, receivables, inventories and other assets, and outstanding debt or liens.
The competitive analysis will identify the opportunities and threats that impact its value. Depending on financial health, market demand, industry trends, location, and other variables, small businesses are usually worth three to six times annual cash flow.
Other valuation factors include how risky the business is and its potential for growth going forward. Finally, if your business is based on a unique technology that’s in high demand, there may be greater buyer interest driving a higher valuation.
Get your documents in order
Gather financial statements and tax returns for the last three to four years and work with an accountant to present them cleanly, with all income shown and no family cars or boats appearing on the books. Buyers want transparency and may even ask for year-to-date results.
Also, make a list of the equipment being sold and all operational contacts, including suppliers and any partners involved in your sales. Write a brief summary that describes how the business runs, or include an operations manual, if you have one, in the document packet.
In addition to documents, check that the business is physically in order and make repairs or replace equipment as needed.
Decide whether to use a broker
A business broker typically costs 5 to 10 percent of the sale price for businesses with less than $5 million in annual revenue. You can save this money by selling the business yourself, often the best way to proceed when selling to a family member or a trusted employee. If you go this route, seek the advice of retired owners, and check information available on the internet from the Small Business Administration (SBA) and the National Federation of Independent Business (NFIB).
However, using a broker can be worth the cost, as it frees up time for you to maintain and even increase the performance of the business. Hiring a broker also makes it easier to keep the sale quiet with employees and customers, and can help you get the highest price, since brokers want to maximize their commissions. The hardest part of selling a business is going through the due diligence with the buyer. A broker has the experience to facilitate this part of the process, and might also be able to steer buyers to financing resources.
Most small business sales are partially paid for by third-party loans, many backed by the SBA. Make sure buyers are able to secure financing. Be aware that banks may also want you as the seller to provide a portion of the financing, so you have a vested interest in the business’s success under the new ownership. If that’s the case, work out details with an accountant or lawyer.
You also want to pre-qualify buyers in terms of how well they fit into your company’s culture—especially if the buyer is another company that will merge into yours. It’s also a good idea to line up two or three possible buyers as backups, have them sign nondisclosure agreements to protect your information, and stay in touch with them all. Finally, put a price on your business that’s reasonable but takes into account the company’s future worth. Allow some room to negotiate, but stand firm on a fair valuation.
If you’re selling a franchise business, you’ll have to work with your franchiser who will approve the new buyer and have them sign a franchise agreement.
If there’s a possibility you might at some point sell your share of a business back to your partner or partners, put an agreement in place now to smooth the transition and benefit both parties.
Prepare the post-sale documents
A business sale may include one or more of these documents:
- A bill of sale with the asset purchase agreement — the legal contract for the sale and purchase of physical assets, intellectual property, noncompete and other employee agreements, and guidelines for the use of website domain names
- An assignment of a lease
- A security agreement in which you as the seller retain a lien on the business
- A noncompete agreement in which you agree not to start a business offering similar services to the same group of customers
- An agreement that the seller stays on as an advisor for a period of time to ensure a smooth transition
Selling a business idea
If you want to sell your business idea to a company, you’ll need a pitch based on a business plan. Read our Expert Summary, “Developing a Small Business Action Plan,” or for more help, register for our Bootcamp courses. Based on this plan, put together a presentation and research potential targets. Protect your business plan with a patent if that’s possible, or ask the company you’re pitching to sign a non-disclosure agreement.
A note on distressed circumstances
If a small business owner is losing money but has kept up with most of the bills and doesn’t want to bankrupt the company, a good option is an asset sale to benefit creditors. Find out more here, from the American Bar Association.
ESOP sale of your business to employees or family members
An ESOP (employee stock ownership plan) is a tax-friendly way for a small business owner to receive value for the business. There are ways to defer tax liability from the sale for several years. The company generally benefits from making a tax-deductible contribution into the ESOP.
One final point
If you clear a nice profit from selling your business, take your time before deciding what to do with the proceeds. Consult a financial professional about tax consequences and financial goals. Then determine how you want to invest the money for the best long-term benefit.
If you’d like more help with finding the right solution for housing your startup, InnovatorsLINK offers a detailed Bootcamp course where you’ll learn the details about all your options. Register here.
Review the Executive Summaries associated with each course prior to attending the courses.
InnovatorsLINK Business Writer and Brand Strategist
A business writer his entire career and successful businessman. He was a partner in a top-10 Boston ad agency, a senior level executive at Young & Rubicam NY and Interpublic Group, and, since 2003, an independent consultant for companies from startups to global leaders, positioning their brands and writing all forms of content to promote their growth.
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