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Selling a small business is not a simple process. Doing your research ahead of time is the only way to ensure you know how to value your business, how to find a buyer, and what to do after you’ve sold.
- Don’t be afraid to get help determining the price and finding the right buyer.
- A Business broker and valuation expert can help you make the right financial decision. Selling your business is a time consuming process that shouldn’t be entered into lightly.
- Have a plan before you decide to sell, it’ll make the process go a lot smoother.
Step One: Determine Your Reasons for the Sale
Before thinking about how much you want to sell for or who you may sell to, your very first step should be to consider exactly why you want to sell. People sell their business for a whole host of reasons, including:
- Issues between business partners.
- An illness.
- Wanting to spend more time with family.
- Simply wanting a change in career.
- Savings for college, retirement, or other big life events.
Once you know your why, you can get a better understanding of who the right buyer may be. As important as determining your why, it is important to have an idea as to what you will do next. When you sell your business you give up the income stream associated with it, and you will have freedom. Many entrepreneurs struggle with the “what now?” question, so contemplating your next steps goes hand in hand with deciding to transition from your business.
Step Two: Consider the Timing of the Sale
You generally don’t want to sell your business when it's gone through a financial downturn or when the economy isn’t doing well. You won’t get the best possible price and you could spend a lot of time (and money) trying to make the sale happen. Consider the timing of your sale and consider waiting until business is good.
Step Three: Calculate Your Small Business’s Value
Before selling, you need to have a realistic picture of what you’re going to get. To calculate your business’s value, your best bet is going to be to bring in a valuation expert. Technically, you can find a general estimate by calculating what three to six times your current cash flow would be (assuming you are not a technology firm). It’s best to get another opinion because most business owners overvalue their business for a variety of psychological reasons.
A professional will be an expert on businesses in your area and field and can give you an outsider’s opinion on how much your business is actually worth. Plus, you can tell any buyers that the price has been set by an industry expert so that when they lowball you you have independent third party calculations and rationale.
Step Four: Decide If You Should Use a Broker
Selling a business can be a long drawn-out process. If you’re not well-versed in legalese, it can be a frustrating time. Hiring a business broker who can take care of the selling process for you may be the answer.
I’ll stop right here and say this isn’t the cheapest option. You’ll need to pay a commission as well as a flat fee. The price may be worth it though since the broker takes care of all the complicated steps involved in selling a business. They also will have access to networks of buyers and financing that would take you years to build.
Step Five: Prepare the Necessary Documentation
Hopefully, you’ve been keeping track of any and all paperwork your business receives. You’ll need all of this for the sale and so the valuation expert and broker can get a proper sense of how much your business is worth. Gather the following before meeting with any professionals:
- Tax returns from the previous three or four years.
- A list of any equipment being sold along with the business.
- A list of employees and any contact information.
- Any financial or bookkeeping records
- Your business plan, if applicable.
- Any policies and procedures.
The internal documentation of how you do your business is of strategic value to the purchaser. It will also give you a clearer understanding of how to transfer business ownership.
Step Six: Find a Buyer
Finally, we’ve gotten to the fun part - actually finding a buyer and considering offers. Your broker can take care of most of the marketing if you decide to work with one. Even if you do end up working with a broker, it can take months, potentially even years to actually sell. To move the process along, seriously consider offers from the first set of buyers. Don’t hold out for better and better, it may not come.
Step Seven: Make Plans for Your Profits
If you suddenly have a large influx of cash, you’ll want to know exactly what to do with it. Making a plan with the help of a financial advisor, CPA, and attorney (as they focus on different areas but work together for your benefit) can make sure your money is going towards the right investments for your future.
Tips for Selling a Small Business
Selling your business is almost like an art form. There are so many ins and outs to know in order to get the most bang for your buck. Here are a few tips to keep in mind during the selling process:
Document Your Processes
A buyer does not want to rebuild systems from scratch, they want to be able to unlock the door the day after buying your business and have it making money. And unless there is an employment or consulting contract, they don’t have you and what is in your head.
Documentation increases valuation because the purchaser has a full understanding of the how’s and who’s that make your business run. You might want to use selling a small business checklist to make sure you don’t forget to include any important documents.
Clean up Your Financial Records Beforehand
If you work with an accountant, check in with them and make sure all of your financials are up-to-date before you decide to sell. For instance, you might wish to decide in advance if you will be selling intellectual property. Having these documents prepared ahead of time can help ensure that you’re not wasting a buyer's time or delaying the sale any longer than you need to.
Hire a Valuation Expert
You may have some idea of how much you’d like to sell your business for, but personal feelings can get in the way, causing you to ignore good potential offers. Or, it could be the other way around, you could be undervaluing your business. A valuation expert is the only way to be sure you’re putting the right price on your sale.
Develop an Exit Strategy
A business sale is a little more complicated than just accepting an offer and getting a check. There’s a lot to think about after you sell the business. You’ll need to decide how to handle such a large sum of money and, more importantly, how to handle capital gains tax. Speaking with a financial advisor, if you don’t already have one, may be the right move at this point, as they can answer those two questions and any others you might have.
Learn How to Spot Authentic Buyers
There are bound to be a few bad offers in a sea of good ones. Learning how to spot these can save you a ton of time, allowing you to focus on better options. Any buyer you work with shouldn’t be afraid of a pre-qualification process where you check their credit and their business plan. Don’t waste your time on buyers that try to make the process difficult.
Increase Your Sales In Advance
Not many people want to buy a failing business. It doesn’t bode well for future profits. If your sales have been struggling, take the necessary steps to turn things around, at least while it’s up for sale.
Keep It Legal
Buyers are going to want to know they’re going to get what they pay for, so they’ll want to see plenty of legal documents to prove they’ll be the new owner of the business. When preparing a sale, make sure you have the following:
- Bill of sale.
- Non-compete agreement.
- Non-disclosure agreement.
- Seller financing agreement, if applicable.
- Inventory list.
- Cash-flow statements.
- Financial statements from the past few years.
Get Paid up Front
Seller financing is a possibility that allows a business seller to offer financing to a buyer. This has its own pros and cons, but it means you’ll be paid the full selling price (plus interest) over a long period of time. Ideally, there would be nothing wrong with this situation, but if you don’t get full payment upfront, your buyer could end up defaulting on their loan and be unable to make payments.
Maintain a Level Head
You’ve created your business from scratch and it’s likely something you’re very proud of. So it’s no surprise that emotions may run high during a big sale. This is why getting help from outside experts can help you leave some emotion out of the equation, allowing you to make the best decision possible.
Mistakes to Avoid When Selling a Small Business
When selling something with such a high price tag, you want to do your best to avoid any mistakes along the way. Here are a few specific mistakes you’ll want to watch out for:
Failing to Plan Ahead
Jumping ahead of the process and not doing your research or preparing your financials ahead of time is a surefire way to delay the selling process. Make sure to take the time to plan an exit strategy before listing the business for sale. The best time to plan for the sale of your business is years before you actually intend to do so.
Waiting too Long to Sell
The longer your business sits on the market, the worse that’s going to look to potential buyers. Waiting too long for the exact buyer you have in your head is just as dangerous as selling too quickly. Yes, you should take your time and review all offers, but don’t pass up a good one just because you think something better might come along. Unfortunately, it might not.
Misrepresenting Your Company
There’s no use in not being honest about the status of your business. Just like you’ll do due diligence for your buyer, they’ll do the same for you. After all, they’re spending a lot of money and want to make sure the purchase is worth it for them.
Not Maintaining Confidentiality
You’ll want to sign a non-compete and confidentiality clause when you sell your business. After all, the new owner doesn’t want you starting the exact same business next door with all of the trade secrets they just bought from you. Not maintaining this confidentiality, or refusing to sign these agreements is a red flag for buyers.
Asking the Wrong Price
Selling a business only to find out you could have gotten hundreds of thousands more for it can be a pretty big bummer. Assigning the right price to your business is the only way to get honest offers.
Choosing the Wrong Buyer
Selling too quickly could have you leaving money on the table. The first offer may very well be the best one, but give your broker time to find multiple offers. That way you have some negotiating power. The right buyer will offer not only the right price, but will have similar values and want to move your business in the right direction.
Trying to Sell Your Business Without Help
If you’re making the mistakes mentioned above, chances are, you’re trying to go through the selling process alone. Not getting input from the experts could mean you pick the wrong buyer, you get a lowball offer on a successful business, or you extend the sale time.
You probably used a real estate agent to buy or sell your home, your business is a lot more valuable. Get the right professionals in place and listen to them.