Retirement, illness, disputes with a partner or even lack of interest can make business owners dream of selling. All of the above legitimate reasons to sell, but even owners who aren’t thinking of selling may want to plan for the unexpected. Therefore, that planning ideally should start when the business is founded. An exit strategy is an important part of any business plan. However, it’s never too late or early to make preparations for selling your business.
How to Sell a Business: The Process
Start by understanding the process. Beginning with generating a valuation, selling a business may involve improving recordkeeping, tightening operations, advertising the sale, qualifying buyers, negotiation and closing.
Just make sure you set aside adequate time for all of the above. From start to finish, selling a business can take six months to a year or more.
Valuing the Business
As a rough guideline, many businesses sell for three to six times annual cash flow. The exact value will depend on many factors, including the industry, business size and overall health. Valuations may also use a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) instead of or in addition to cash flow.
Many firms hire professional valuation advisors. These experts will likely charge several thousand dollars and consider sales, profits, receivables, payables, assets, liabilities, and other factors in setting a value.
Preparing For Sale
The business valuation report will help identify opportunity to increase the value of the company. For instance, in addition to purely financial metrics, management expertise, customer diversification and prospects for growth can affect valuations. Getting rid of outdated inventory, updating business software, trimming unnecessary staff, and replacing worn fixtures are all ways to spiff up a business before putting it on the market.
Many business owners are advised to improve their financial recordkeeping before putting the business on the market. Working with a reputable accountant to clean up the financial statements helps reassure prospective buyers’ that there won’t be any unpleasant surprises.
Getting a Broker
Not all business sales require a broker. If you’re planning to sell to a family member or long-time employee, skipping the broker can save the commission of up to 10% of the sale price. However, unless you already have a buyer lined up, a broker can be a good ally.
A broker will be able to perform a business valuation as well as recommend ways to make the business more appealing. They will know how to prepare important documents. They will also contact potential buyers and lenders, navigate the due diligence process and negotiate pricing.
Finding the Right Buyer
Once you have a broker, it’s time to attract buyers. It could take months or even years to bring in the right buyer, so be patient and advertise the business on a number of different platforms.
Also, don’t waste your time with unqualified tire-kickers. Pre-qualified buyers should have adequate finances for making a deal before an owner expends time and energy showing the business.
Many sellers don’t want customers, suppliers, and others to know the business is up for sale. If this is an issue, word your ads discreetly so your business identity remains confidential. Also, consider having prospects sign non-disclosure agreements.
Getting the Details Right
Few business sales are made with a handshake. Like any transaction involving a large sum, there is plenty of paperwork. Key documents include non-disclosure agreement, offering memorandum, letter of intent, term sheet and bill of sale. To get this paperwork right, in addition to a business broker and accountant, an attorney is an important advisor.
Negotiating a business sale involves much more than agreeing on a price. Sellers often stay on board in some capacity for a year or more during the transition. Lenders financing business sales often want the seller to take a note from the buyer as part of the deal. These details may be more important than the price.
Protecting the Profits
Selling a business can generate a significant windfall. Some advisors suggest devoting a small portion of the cash to a reward. After that, safely bank the rest while discussing with advisors how to handle it.
Taxes can be particularly important and there are a number of strategies. For instance, spreading income over several years with a payment plan can reduce taxes compared to taking a one-time payment.
Not every business launches with the intent to eventually sell it. But under the right circumstances a sale can be a satisfying and profitable way to leave the business, customers and employees in good hands while freeing the former owner to seek new opportunities.
Even if a business owner isn’t considering a sale, it’s worth devising an exit strategy or succession plan. Unforeseen circumstances have no respect for your business plan.
- If you’re considering selling your business or just want to put together a fallback plan, a financial advisor can help. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- Maybe you’re thinking of buying a business that someone else is selling. SmartAsset offers tips for buying an existing business, or even starting a small business of your own.
Photo credit: ©iStock.com/shironosov, ©iStock.com/PIKSEL, ©iStock.com/Kenishirotie
The post How to Sell a Business: Everything You Need to Know appeared first on SmartAsset Blog.