Let’s imagine the time has come to think about selling your company. Unfortunately, the majority of business owners don’t understand the basics, let alone the nuances involved. Maybe this is why less than 20% of privately-owned businesses actually sell? There are numerous steps required to run a process successfully, and ignoring any of them can lead to less-than-satisfactory results. While every business is different, there are ten basic steps all owners need to follow when putting their business up for sale.
One: Determine Your Objectives
Before selling a business, sellers must always evaluate and understand their real objective. In many cases, the seller is retiring. However, there are times when the seller may be tired of the business and be looking for new challenges. Your reason for selling will impact the price and various strategies used to market the business.
Two: Set a Price
Far too often, sellers are too emotional when it comes to determining a value for their business. We understand. You’ve put years of effort and cash into the business and may have a hard time setting a realistic price for the company. This is a time when seeking advice from a business broker can be extremely helpful. Unfortunately, you won’t get paid for all of your blood, sweat, and tears. However, your business has provided you with a nice living for you and your family. All businesses, large or small, are risky endeavors. You are likely the key piece that makes the business “go”. Without you, the business may not survive. Any astute buyer realizes this. Multiples for small and medium-sized businesses are not life-changing events, as they they may be in technology or other venture capital deals. Your deal will likely bring you a few years worth of profits. Be reasonable with your expectations. Your business is risky, they all are. Transferring that risk to a buyer is even more risky for them. Reasonableness is key.
Three: Explore Your Exit Strategy Options
When selling a business, the owner may want a clean break from the company. That’s especially true if the seller is retiring. However, there are times when it makes sense to entertain other options. For example, the seller may be open to retaining partial ownership in the company, if it is not an SBA-backed loan, or staying on to help during the transition to new ownership. Don’t be afraid to explore all available options when considering offers. If you’re considering selling in the near future, now is the time to start thinking about exit strategy options.
Four: Get the Company’s Financials in Order
All potential buyers will expect access to clear, concise financial reports. Today’s buyers are taking the time to evaluate all financial documents and will, understandably, be concerned if there are any irregularities. Before going to market, meet with your bookkeeper and CPA as much as possible, making sure all financial statements are up to date and reasonable, and pay special attention to any irregularities. Be able to explain these to a buyer or bank. Have at least three years of tax returns available as well as detailed P&L’s and balance sheets. Keep in mind, banks are obligated to use tax returns and not P&L to make lending decisions, so keep variances between these to a minimum if you want the highest sale price and best terms.
Five: Make Changes to Boost Your Business’s Value
It may seem counterintuitive, but taking steps to boost productivity and sales before selling can be vitally important. Here, it’s important to seek help from accountants and other advisors before making substantial changes. Be aware that buyers are more likely to purchase a business that’s already functioning well rather than having to make substantial changes after the purchase. Cutting unnecessary inventories, updating clearly-outdated equipment, and improving the “bench strength”, i.e. the management personnel, of a business may all be appropriate steps to consider. Before these steps are made, though, it’s important to discuss with your business broker whether these are worth it or necessary.
Six: Decide What You’re Selling
Business owners frequently have multiple ways to market their business. In an “asset sale”, real estate, specific furniture, such as family heirlooms, and other assets can be sold or retained by the seller. However, since a buyer is buying the business for the cash flow of the business, anything that helps produce the cash flow is usually included. This includes the goodwill and intangibles, such as customer lists, processes and procedures, employee handbooks, as well as furniture, fixtures, and equipment (FF&E) and at least a “turn” of inventory. In some instances, sellers might wish to retain ownership of the facility and lease it to the buyer. Every option should remain open to consideration, as the seller and a specific buyer may have different goals for the transaction.
Seven: Get Expert Advice
It’s not always obvious when a seller needs professional advice. However, before placing a business on the market and selling your company, consider working with investment advisors, attorneys, accountants, bankers, and a business broker to make sure the sale is structured in a way that won’t create issues later.
Working closely with trusted professional advisors during the sale reduces the chances of running into legal and tax consequences that would derail a transaction or significantly reduce the net proceeds. Yes, consulting with experts isn’t always cheap, but their advice can, and often is, crucial when tough decisions must be made.
Eight: Find a Business Broker
The most important expert to consult is a business broker who’s familiar with the type of business you’re selling and the industry. Since there are vital decisions to make when considering selling your company, having an expert available to discuss various issues with can eliminate potential issues during the sale process.
Your business broker will be instrumental in developing marketing strategies tailored to your company’s specific needs, including determining an asking price for the business. This will also include highlighting various strengths about the business that can be counterintuitive to sellers. The business broker must explain the weaknesses in a way that will not scare off potential buyers. This is not always easy, since no business is perfect. Your business broker must be honest and forthright about problems with your business, since it is always better to be upfront with issues, rather than waiting until later, when time and money are wasted on a deal that wasn’t going to happen in the first place. Your business broker handles the majority of details during the sales process and is available when questions arise. If the Seller’s role in the sales process is in question, the business broker will describe what actions a seller should consider and which ones should be reserved for the broker to handle.
Nine: Qualify Potential Buyers
Today, it’s increasingly important to know who you’re dealing with when negotiating a business sale. Many sales fall through when the financing isn’t secured ahead of time. Business brokers generally want to see personal financial statements from prospective purchasers or at least get a potential buyer to one of their bankers as soon as possible for verification. Sellers want to know a party they’re negotiating with has the ability to complete the transaction. As a rule, it’s prudent to withhold some confidential information until a buyer demonstrates their financial ability to perform.
Ten: Negotiate the Sale
While the established price for a business should be realistic, a buyer will rarely purchase a business without negotiating that price. Sellers must always be aware that virtually all terms in a contract are negotiable, and it usually makes sense to look closely at any offer before simply accepting or rejecting it.
Again, prudent sellers will ask their advisors and attorneys to review the terms to ensure everyone understands what’s involved and business brokers should know how any clause could negatively impact the financial results while attorneys should know the legal ramifications. Difficult negotiations complicate transactions, but they are a necessary part of the process to make sure a Seller not only gets the best, after-tax proceeds, but the terms can have major financial implications, as well.
Your Actions and Choices Matter When Selling Your Company
Successful business sales rarely just happen. They require a lot of work from all participants, including both the Seller and the Buyer. The actions sellers take throughout the sales process will impact the end results. Working with a business broker helps sellers set and attain realistic objectives during the sales process.
If you’re considering selling your company in the near future, take the time now to start preparing. If you’re unsure how to proceed, contact a business broker for advice.