After working hard to build up your business, you may decide that it's time to reap the benefits of your sacrifices and efforts by selling it.
However, selling a small business is complicated. It's emotional and takes a lot of work and planning to find the right buyer and get the best price. There are also issues you need to address to have a successful sale.
Why Are You Selling?
An interested buyer is going to ask why you are selling, and you need to be prepared to answer that question. Your answer should be thoughtful and make sense to a buyer.
Buyers do not want to invest their money in a company if they believe the owner is running away from hidden problems.
There are certain reasons that owners often give when selling a business:
- wanting to retire
- feeling overworked
- disputes with partners
- needing a change
- illness or death
Think about the reasons why you actually want to sell and be sure selling is the right thing to do. Don't rush into making this decision.
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When Do You Want to Sell?
The best time to sell a business is when the economy is strong, sales are increasing and profits are good. Unfortunately, all these factors are not always in alignment at the same time.
You have to gauge these conditions and decide when would be the best time to sell. If conditions are not right, you may want to delay selling your business and work on increasing sales and improving its efficiency and operations until the economic climate is more suitable for selling.
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Valuating the Business
Hire a business appraiser to establish a value for your business. A professional appraiser can explain in detail why a business is worth the price they come up with. Having this done by an outside third party establishes credibility for the asking price. Buyers will be more comfortable with a professional appraisal rather than a price that you think your business is worth.
You can get an initial valuation for setting a price yourself by calculating the seller's discretionary earning (SDE). The SDE starts with the business’s operating earnings before interest, taxes, depreciation, and amortization (EBITDA) and adding back the owner’s compensation and any fringe benefits paid through the business that the new owner will not continue.
Then you take this figure and multiply it by a number that is typical for your industry. This industry multiplier will be in the range of one to four times your SDE.
Suppose, for example, your company's EBITDA is $100,000, and you draw a salary of $75,000 per year, for an SDE of $175,000. If the multiplier for your industry is three, then an approximate valuation of your business would be $525,000 ($175,000 x 3).
Using a Broker
Business brokers will charge in the range of 10 to 15 percent of the sale price. This may seem like a high price to pay, but an experienced business broker will be worth every penny.
A business broker knows the best ways for marketing your business, identifying a buyer and the steps for qualifying and verifying the buyer. They’ll put together a prospectus for buyers and, if needed, may be able to help serious buyers find financing for the purchase.
Selling a business takes time, and your time is better spent improving your business by getting it ready for sale. Let the business broker use their time and earn their commission.
Preparing for the Sale
Selling a business takes preparation. You should start preparing a year or two ahead of when you would like to sell the business.
Look at your business and its operations. Maybe it's time to reorganize its structure and retrain some employees. If sales are lagging, maybe it's time to reenergize your sales force or reconfigure your product line.
Take a step back and identify the strengths and weaknesses of your business and start working on those areas that would make it attractive to a buyer.
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Getting the Documents Ready
Gather your financial statements and tax returns for the past three to four years and go over them with your accountant. Make sure all the figures are correct and present the business's assets in the best way possible.
Put together a list of all business-related contacts, client lists and suppliers. Prepare copies of any existing contracts and agreements with outside parties. This would include copies of leases.
Your business packet should explain how the business works. Who are your customers? What is the marketing plan? What are the responsibilities of each employee?
If you don't already have one, you should put together an up-to-date operating manual that explains how each activity in the business is conducted.
Be honest. Make notations about any equipment that needs to be repaired or replaced. Potential buyers are always concerned about what problems the business owner is hiding. So being upfront about any potential problems of which you are aware establishes more credibility with buyers and makes them feel more comfortable with your asking price.
Have a non-disclosure agreement (NDA) ready for interested buyers to sign to protect your private information. You’ll need an NDA with every potential buyer before you have any serious discussions and open up your accounting books.
Talking to a Lawyer
Selling a business is a complicated transaction. If you’re using a business broker, they'll probably already have sales agreements, but you’ll want to have your own lawyer review the contracts to make sure all the critical issues are covered for your protection.
If your lawyer is not experienced with contract law, ask for a reference for another attorney. Selling a business is usually a once-in-a-lifetime event, so you'll want the best legal advice possible to deal with issues that you don't confront every day.
After you've come to an agreement with a buyer and are setting the terms, it's best to get full payment upfront. Accepting a down payment and agreeing to receive the balance in future installments has considerable risks.
You don't know how well a new buyer will be able to run the business. Existing customers may become dissatisfied with the new service and leave. Employees may not get along with a new owner and look for other jobs. And a new owner might not have enough funds or enough liquidity to pay bills on time, causing suppliers to cut off deliveries.
Any of these reasons could leave a new owner with a cash shortage and unable to make the agreed installment payments for the purchase.
- Small Business Admiinistration: Close or Sell Your Business
- National Federation of Independent Business: How to Sell a Small Business in 7 Steps
- CNBC: How to Sell Your Small Business
- Forbes: Selling A Small Business In 30 Days: How One Couple Sold Their Bakery For Six-Figures
- SCORE: When, Why and How to Sell Your Small Business
- Internal Revenue Service: Sale of a Business
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.