How to Sell Your Business | The Process Explained
Are you thinking about selling your small business? If you’re not now, you should still be familiar with the process in case of an emergency. Should the time come when you need or want to sell, there are a few key factors that are really important. If you take the time to prepare along the way, it’ll make things that much easier when the time comes. Selling a business is no easy feat, especially when emotions are involved. If you have your hard work and tears into a project from the ground up, it’s going to be tough to walk away from. As with all emotional deals of such a large capacity, it’s probably a good idea to enlist a professional who knows the ins and outs of this sort of deal. At the very least, you will want the help of an accountant, broker, and probably an attorney. Hiring professionals to help get your business in the best position possible will make all the difference when it comes to selling in a timely manner and making a profit.
If you are thinking about selling your small business, make yourself familiar with the following seven steps:
1. Reason for Selling
It probably goes without saying, and you may already have a very clear reason for the sale, but it’s important to convey the message in the most beneficial way possible. You don’t want to give a potential buyer any reason to think this is not a good business to step into. Whatever your reason, be sure to put a positive spin on it so that a buyer doesn’t see any negativity in the situation. A few common reasons for selling are; retirement, illness or death, boredom, being overworked, or a dispute with a business partner. Buyers don’t need to know every little detail, but they will be interested to know why you’re looking to part ways. You should never give any indication that it has to do with the business itself not doing well.
2. Get Your Financials in Order
This step is incredibly important. All potential buyers are going to spend a considerable amount of time analyzing your financial statements . This is when it’s important to spend a lot of time with the accountant and make sure all inventory, assets, sales, and expenses are documented accordingly. You will need to provide tax returns and income statements for at least three years prior, if not more. If any important documentation is missing, it could send red flags to the buyer. Keep your financial statements as clean as possible leading up to the sale, and then have your accountant go over them again with a fine-tooth comb. Don’t get into the habit of accepting cash deals that are not documented properly, and be sure not to have any personal vehicles or boats listed as company assets. It’s likely the buyer will want to review your year-to-date results to make sure the business is profitable.
3. Business Valuation
Do you know what your business is worth? Don’t go off what you think; hire a professional to evaluate the status of your business. This is not an area to skimp out on. A third-party valuation can offer credibility to the value of your company . You know your business better than anyone, but a qualified valuation will take things into account that you may not be so versed in. On your own, you can estimate your business value to be somewhere in the range of three to six times your current cash flow. For a flat fee (well worth the money), a third-party valuator will help get a much more precise figure of your company’s value. They will consider a variety of things such as sales, receivables, inventory, assets, and all outstanding debts to better define risk vs. value. Other things to be considered are market demand, industry trends, and location. If you can show that your business has very little risk and much more growth potential, you‘ll be in a great place to ask for a premium price.
4. Outline Your Exit Strategy
Don’t wait for an unexpected turn of events to get started putting the pieces together. This is something that should be well thought out and prepared for. If you are pressed for time, you are more likely to overlook things or make a mistake. A successful small business owner should always have a plan in the back of their mind, should things take a turn they weren't expecting. If you have taken the time to build a strong business, you should also take the time to plan how that business will continue to thrive after you part ways. Nothing lasts forever, and whether forced to or not, the day will come when you need to step back and hand over the reins. A few important aspects to consider are if the sale will include the existing staff, organizing managerial promotions, and spotting potential pitfalls that could occur ahead of time. Most importantly, how much would you need to make from the sale to get through the following years?
5. Increase Revenue
Anytime you sell something, you want to get it in the best shape possible. The same holds true for selling your small business. If sales reports are trending downward, it is not a good time to sell. Before you put your business on the market, you’ll want to boost your marketing efforts to bring in more sales. If you spend a little more on advertising and promotions, it should rev up your sales and make your business more appealing. Put some effort into your curb appeal and update operating systems - the investment will come back to you after the sale. It’s important to show a diversified source of income. If the majority of your sales, or even just 20 percent, come from one single client, it could appear risky to a potential buyer. If you can show a diversified and consistent customer base, the buyer will see little that could go wrong with the deal.
6. Hire a Professional
As with all business deals involving large sums of money, it’s best to have a professional on board to confirm everything goes smoothly. A business broker will help walk you through the process they know so well and can even assist the buyer in obtaining financing for the sale. You’ll want to prequalify buyers before you get too far into the process and be leary of any offers that don’t feel right. The broker will have the final say on the valuation of your company. An experienced business broker will have a large network of buyers they can tap into, as well as marketing strategies to bring in new interest. Brokers will negotiate to get you the highest price possible because they earn a commission off the sale of your business. If you already have a buyer in mind, you can save on broker fees and just hire an attorney to cover the paperwork involved.
7. Prepare Documents and Contracts
This is another very important step to safeguard your assets and sensitive information. A lot of times, you’ll want an attorney to draft a Non Disclosure Agreement (NDA) for all potential buyers, so none of your proprietary information gets leaked should the deal go south. Sadly, sometimes competitors will pose as buyers just to get valuable information about your business. Protect yourself and your business by having the appropriate legal documents set in place. You could save money by preparing your own sales contract if you felt it would be sufficient, but we would strongly urge you not to. They are typically 25-50 pages long and consist of lengthy legal matters such as asset listings, noncompete information, and existing employee agreements. It is standard to include in the contract that the seller remains available to the new buyer for a set period of time to help ensure a smooth transaction. It is better to spend a little extra cash on an attorney who will oversee everything covered in the contract.
Bottom Line
Selling a small business takes a lot of work. It’s best to have a team in place to help with all the details. You will have emotions tied to the business that outside professionals don’t, so they have a better view of what it’s worth and what needs to be done. If possible, you should start preparing your business for the sale at least 1-2 years in advance. Get your financial matters in order and get your business in the best shape possible to see a bigger return on your investment.