Sell a Business – How to Get Started
Most first-time sellers don’t realize what’s involved in order to sell a business or how much money they could get. There are many reasons that lead business owners to think about closing or selling their business. Partner disputes, retirement, illness or death, major life changes, overwork, boredom or other personal reasons can make continuing work at your business impossible.
Unfortunately, many people end up closing the doors instead of selling their business and enjoying the “sweat equity” that they’ve earned over the years. For many small businesses, exploring a sale may make more sense. Cash flow, location, recurring customers, company brand, and physical assets can all have value to potential buyers. The decision to sell a business is complex and requires planning that can take up to a year to complete. This post will focus on the steps that are essential to selling your business.
Questions to Consider when Deciding to Sell a Business
As we discussed in Three Things Buyers Look For, it is important to sell a business from a position of strength to achieve the best possible outcome. That means increasing profits, repairing infrastructure, and demonstrating business opportunities. You also need to consider how effective your business would be in the hands of a new buyer. To consider whether selling your business is right for you, consider the following questions:
- How important are my personal contributions to the business?
- What is the fair market value of the business?
- How important is it for me to sell the business immediately?
These are just a few of the questions that might affect your sales strategy. Ideally, you should prepare to sell a business a year or more in advance. By being better prepared and giving yourself time to position the business for a sale, you maximize your chances to profit on your years of sweat equity by selling your business instead of simply walking away.
How to Begin to Sell a Business
The process of selling a business depends on your business structure, debts, assets, whether you own or rent the property, and other factors. For example, if you rent, you will probably need landlord approval to sell the business and he or she may need to approve the buyer. If you’re subject to government financial or industry regulations, you might need to demonstrate to a potential buyer that you are compliant with those regulations and have systems in place to maintain compliance.
You’ll need to gather information about the company’s financial history, growth and perhaps even prepare a SWOT analysis to share with potential buyers. SWOT stands for strengths, weaknesses, opportunities and threats and is a traditional way of framing a discussion about a business’s strategic outlook. You should also identify other information commonly included in a business plan and create or update your own.
You’ll also need to determine what steps you feel you should take before you can sell the business. That might mean simply hiring an attorney or business broker, but larger sales usually require a team of advisors. Necessary steps can include:
- Determining a reasonable timeline for the sale
- Hiring legal representation
- Updating your knowledge of local regulations
- Sprucing up any property associated with the business
- Getting inspections
- Building a company website if you don’t have one
How to Support an Asking Price
Valuing a small business depends on several factors. To achieve the best value, you will need to support your asking price by:
- Assembling Financial Statements
You’ll need to gather records that include an income statement, cash flow statement, balance sheet and profit or loss statement that shows your income and cash flow
- Preparing a List of Tangible Assets
You need to list all physical assets of the business including product inventory and supplies, business property, tools, furnishings, equipment, patents and fixtures.
- Preparing a Statement of Discretionary Cash Flow
We have discussed the importance of cash flow before, but a discretionary cash flow statement is a document that includes the full earning power of your business.
Most small businesses are priced between 100 percent and 400 percent of the seller’s discretionary cash flow. However, this can vary tremendously depending on industry, business size, market potential and other factors. You should consider discussing your pricing strategy with your accountant, business broker, or a business valuation expert to determine what you should ask for your business.
Using Multiple Platforms to Sell a Business
Online listing platforms, such as here at FirmExchange.com, offer the ability to reach a wide range of potential buyers. However, you should think about utilizing multiple ways to find potential buyers when trying to sell your business. For example, you can advertise the sale in traditional media, personal or professional networks. There is some risk to selling through traditional media ads because the news of a sale could dishearten customers, stakeholders, and employees if not done properly.
Transaction Considerations to Sell a Business
As a seller, you might consider different options to encourage the sale and get the maximum value for your business. Depending on your financial situation, you could offer to finance some or all of the deal. This can be helpful when working with otherwise qualified buyers who don’t have the necessary cash to close the deal. Some buyers may require that you sign a non-compete agreement that prevents you from selling the business and then starting a similar, competing business.
Another option to consider is an earn-out, or milestone payment. It can often work to bridge the gap when buyer and seller can’t agree on price, and typically works this way:
- You agree to continue working for the company for a specified time, usually one or two years
- You agree to a minimum sale price
- If the company reaches certain milestones, you get additional money for the sale
As you can see, it’s not a simple process to sell a business. There are multiple ways of estimating business value, pricing your business, finding a suitable buyer and negotiating a favorable deal. That’s why so many people just shut the doors without converting their equity into cash. But for many businesses, with a little bit of planning and work, a successful sale can be realized.
Join today and see how Firm Exchange can help make your deal a success. Get started on your listing for free and only pay when you are ready to publish your listing.
DISCLAIMER: The information contained in this article is for informational and discussion purposes only, and should not be relied upon without seeking your own professional advice. The Firm Exchange, LLC is not a law firm, accounting firm or professional services firm, and accordingly it disclaims any liability for any reliance on the contents of this article. As each situation is unique, you are encouraged to discuss your specific situation with a qualified attorney, accountant and/or other relevant professional services provider.