Thinking about selling your business? It’s likely to be one of the biggest – and most difficult – decisions you’ll ever make. But one thing is certain; it takes serious preparation for a sale to be successful. Sellers who understand where they stack up in the marketplace, offer a realistic asking price and are aware of a potential buyer’s suitability before they sit down to negotiate are more likely to walk away happy with the transaction.
It’s not something you can do on a whim…a lot of planning needs to be done. It’s wise for potential sellers to begin at least a year in advance to ensure that all their bases are covered. That may mean everything from getting accounting or taxes up to date to making a store more attractive and updating – or upgrading – operating systems.
If you’ve made the decision to sell, here are some tips to make the process easier:
1. Determine your company’s value
Getting the accurate valuation requires a business appraiser. The appraiser will draw up a detailed explanation of the company’s worth. That will bring credibility to your asking price and can serve as a gauge for your listing price. A review should look at everything from sales to receivables, inventories and other assets, as well as outstanding debt or liens, all with the goal of identifying business threats and opportunities that define value. Before you spend big dollars on an outside firm, consider your nearby Small Business Development Center (SBDC). In addition to their SBA credibility, they are an affordable way to get a fair appraisal.
Small businesses are typically worth three to six times their annual cash flow, depending on their overall financial health, industry trends, market demand, location and other variables. The analysis itself relates to how risky the business is and how much potential for growth it has.
2. Clean up your financials
This – obviously – is critical. Buyers and lenders expect as much transparency as possible. An owner can avoid potential problems by pulling together financial statements and tax returns dating back three to four years and reviewing them with an accountant to ensure an accurate accounting of all income and expenses.
3. Have an exit strategy
Owners may sell their businesses for many different reasons, including:
- Retirement
- Partnership disputes
- Illness or death
- Becoming overworked
- Boredom
Preparing an exit strategy now, before any of these forces a sale, is critical. The strategy may be as simple as grooming a family member or trusted employee to move into ownership, or working with a broker to find an outside purchaser. In any case, knowing how the transition should occur in advance can make the process simpler and less stressful for owners and those around them.
4. Boost your sales
Buyers always want to be assured that the business they’re pursuing has a clear upside Declining sales are a particular red flag. If the business is not in retail, reliance on a single customer that represents more than 20 percent of revenue could putting sales at risk if it is lost. Prior to offering the business for sale, look to further diversify your customer base or build sales through increased efforts in marketing and promotions.
While you’re at it, push out bloated inventories and get everything you can up to date. Retail establishments might need a fresh coat of paint and new fixtures, while restaurants might update their menus or equipment. The bottom line: what do you have to do to get sales to increase?
5. Find a business broker
Selling the business yourself allows you to save money and avoid paying a broker’s commission. It’s also the best route when your exit strategy revolves around selling to a family member or current employee.
However, there are many reasons to consider outside help with a sale. For companies with less than $5 million in annual revenue, “help” usually means bringing a business broker onboard. Broker fees usually involve a 5-10% commission based on the sale price. In many cases, the broker can also perform the business valuation. He or she then prepares a prospectus and then works to find prospective buyers by listing where buyers are most likely to be. A good broker can also attempt to help buyers find financing.
Through all this, a broker can also help free up time for you to keep the business running efficiently, or keep the sale quiet and get the highest price (because the broker will want to maximize his or her commission). Discuss expectations and advertisements with the broker and stay in regular communication.
6. Pre-qualify your buyers
The vast majority of small business transactions are paid for in part by third-party loans, with a majority of them backed by the Small Business Administration (SBA). When deals fall through, it is most often due to the fact that the buyer was unable to acquire suitable financing.
The sale may take between six months and two years according to SCORE, a nonprofit association for entrepreneurs and SBA partners. Finding the right buyer can be a challenge. Once you have found prospects, here’s how to keep the process moving:
- Have a minimum of two to three potential buyers
- Stay in regular contact with all of them
- Determine whether they qualify for financing before providing business information
- Allow negotiation room, but stand firm on a price you believe is reasonable
- Put any agreements in writing. The potential buyers should sign nondisclosure and confidentiality agreements for your protection
7. Get business contracts in order
Any transaction this large is bound to have a ton of legal paperwork. Here are some of the most important documents you are likely to see:
- The bill of sale – or purchase agreement – which transfers the business assets to the buyer
- An assignment of a lease, if one exists
- A security agreement, which has the seller retain a lien on the business
In addition, the buyer may have you sign a non-compete agreement, in which you would agree to not start a new business in direct competition with the one you sold.
Expect the purchase agreement to be comprehensive — often 25 to 50 pages – and may include the non-compete, asset listings, employee agreements and guidelines for the use of website domain names. It does not account for the sale of any stock.
On occasion, there might be a request for you, as the prior owner, remain in an advisory capacity for a set period of time to ensure a smooth transition. These agreements usually are short-term, and should not extend beyond one year.
Once the business is sold, you’ll need to determine how to handle the profit in a tax-advantaged fashion. Again, an accountant or other tax professional can be of great value to ensure that you are able to keep as much of your profit as possible.
Selling a business is time-consuming, and for many people it’s an emotional venture. When all is said and done, though, the large sum of money in your bank account and newfound free time (if that’s your choice) will make the grueling process seem worthwhile.
With your sudden influx of cash, First Internet Bank can be a valuable resource, offering sound advice, along with a full suite of business banking products and services to meet your needs that also includes expertise in commercial, SBA or CRE loans so you can really make the most of those proceeds. Want to know more? Be sure to visit firstib.com/business for the complete lowdown.
