You have worked hard to build your business into potentially your most valuable asset and now it is time to sell. It is equally important to work just as hard before and during the selling process to make sure you are able to attain the highest value possible for your business. Below are some tips that should help you sell you business and make the process flow smoothly.
Know Why You Want To Sell
The first question most buyers will ask when evaluating a business purchase is, “why does the owner want to sell”. There are many reasons to consider selling and it is best to determine your reason up front. Some of the most common reasons are:
- Retirement (the best reason)
- Illness, either you or a spouse
- Recent success resulting in a spike in value
- Market shift requiring additional investment to continued growth
- Lost desire to run the business, boredom
- Personal financial needs
- Increasing competition
- Business downturn
All of these reasons are legitimate, some are positive for the buyer, others not so much. It is important to be honest with a buyer and yourself to avoid “sellers remorse” after the deal closes.
Prepare Well In Advance
There are many things that should be accomplished before your business is put on the market. It is best to start planning years in advance. Here are some of the steps you should take before you business goes on the market.
Clean up your Financials – Owners historically run some level of personal expenses through the business. Smaller businesses often have cash sales that never make it into the books. All of these accounting manipulations have a positive impact on taxes. But they also have a negative impact on business value. If you want to maximize value, it is important to clean up you financial for a period of time prior to going to market. Buyers will pay for verified cash flow but they will not take an owners word about hidden cash or non verified personal expenses.
Clean up your facility – This may seem obvious but a clean organized place of business gives a strong first impression and also makes the operation look well run, successful and professional. Also, if the facility is owned, make sure there are no environmental issues that will pop up later on if the building is sold along with the business.
Train Your Employees – Buyers like to see that key employees are well trained and can handle the business when the owner is not there. Prepare by giving employees more responsibility.
Determine The Correct Value Of Your Business – How can you know if you want to or can afford to sell if you don’t know the value of your business. Get an experienced person to do a opinion of value up front. There are several methods to determine value. The most common are:
- Multiple of Financial Performance or earning capacity
- Asset Value Method, applies if asset value is higher than the value determined by cash flow
- Comparable Sales or Market Value Method
- Discounted Cash Flow Method, applies if future cash flow can be accurately forecasted
When The Business Is On The Market
Keep it Confidential – It is usually important for a time to keep everything confidential which can be difficult for a smaller business where the potential buyer might be local. In particular, in is important to keep the possibility of a sale from important customers. Customers are most concerned about their own businesses and may reach out to other sources if they are nervous about the future.
Be sure that all potential buyers sign a non disclosure agreement and are financially qualified before they know the company name and receive any financial information. You don’t want your personal and business information indiscriminately distributed to unqualified individuals.
As far as employees are concerned, that is a trickier situation and depends entirely on personal relationships. But, it is important to keep in mind that your well trained employees will be more critical to a new buyer than they are to you, an experienced owner.
Keep Your Eye On The Ball – I cannot stress this point enough. After the business is on the market an owner needs to continue to work hard to keep the business growing and on track. Far to often I have seen owners have “one foot out the door” once the business is listed. This is a recipe for trouble.
Prepare A Selling Memorandum – It is important to prepare a document that presents your business in the best possible light. The memorandum should contain a summary, descriptive information, financial information and market information. In summary it must contain enough information for a buyer to decide whether it is worthwhile to devote the time to make a trip to visit your business.
Finding A Buyer – This depends greatly on the size of the business. Not many buyers will relocate a family for a business under a certain size unless there are lifestyle considerations in play. Today, unlike, when I started in this business, most buyers are found online. There are numerous online business for sale websites that are used to generate exposure. Business brokers often have a select network of trusted brokers who can often help. Selective local advertising can also be effective depending on the business.
When You Get An Offer
I will not spend much time on this but when you have an acceptable Letter of Intent (LOI) it is time to involve advisors to evaluate the tax and legal implications. Make sure that you accountant and lawyer are well versed in business transactions. Be aware that because of the current environment, most buyers today expect some level of seller financing. It is wise for you to be aware of this going in. Seller financing is important for several reasons:
- It helps with obtaining bank financing
- It can result in a higher sales price, and most importantly,
- It gives the buyer confidence knowing that you have confidence in the business going forward.
Should You Use A Business Broker
This is a decision that must be made by assessing your capabilities and time commitment. If you feel that you can:
- Accurately value your business
- Prepare a detailed Selling Memorandum
- Find, meet, qualify and screen buyers and
- Assist with an LOI and deal structure while continuing to keep you business running smoothly, then you probably do not need the services of a business broker.