Selling a business takes time, preparation, and careful planning. Research suggests a sale can take anywhere from six months to two years. While the process can be tedious, research shows asking prices climbed 11% at the beginning of 2020, according to BizBuySell.com, a site that lists businesses for sale.
Currently, there is some hesitation in the market after the Coronavirus swept through the country, but given the long runway needed to sell a business there are many steps that can be taken now to prepare for the sale.
To help owners get ready to sell their business, we’ve created this guide. We’ll cover:
- Reasons to sell
- What to consider before selling
- How to sell a business
- What you should know about a business broker
- Mistakes to avoid
- Additional resources
Reasons to sell
One of the first things a potential buyer will ask is why the owner has decided to sell. It’s important to be able to articulate the reason a business is on the market.
While there are many reasons to sell a business, the most common reasons include:
The most common reason people sell a business is that they’re ready to retire. While many owners want to tap a family member to take their place, many don’t have the interest or the skills to do so. When this happens, the company goes on the market.
In some cases, owners want to sell a business that’s no longer performing as it once was. Whether the owner doesn’t want to invest in the company anymore or just doesn’t know how to invest in it to make it better, the owner can decide to turn the reins over to someone else.
While a company can be sold at this time, it’s not ideal. The valuation of a company with decreasing profits won’t be as high as an owner wants and buyers will scrutinize the asking price.
Business is booming
On the opposite end of dwindling profits, owners may decide to sell their company when profits are soaring. For those looking to sell, it’s a smart play. Businesses with growing revenue can be priced higher and tend to attract more buyers.
While it’s an ideal time to sell, it tends to be harder for owners to get out. When things are going well, it’s easier to put off selling the company.
An owner may have a new opportunity elsewhere.
Maybe an owner has more than one business and wants to focus solely on one, or perhaps he or she wants to offer consulting services to other companies instead of putting in long hours as an owner.
Either way, a new opportunity could create a short timetable to sell the business. If that’s the case, the owner may want to lean on a business broker to expedite the sale.
As a business grows, so do its challenges. It’s not always easy for partners to continue to agree on the best path for a company, and that can lead to problems. If a partner wants to leave, the other partner usually has the option to buy the other out.
If a partner buyout isn’t a possibility, selling a partnership interest is possible but difficult.
Most people who are interested in buying a business aren’t willing to work with someone else. As a result, when partnerships issues arise and a buyout isn’t possible, the entire company usually goes up for sale.
Death or family illness
Sometimes the reason to sell a business is because of a death in the family or a serious illness. When these life changes occur, so do a person’s priorities. While these situations vary by person, it can inspire the need to sell a business.
What to consider before selling
For sellers entertaining the idea of exiting a company, there are a few things to consider, including:
Timing of the sale
Time is everything. Ideally, an owner will sell a successful business when it has consistent growth and great sales during a time when the economy is booming. However, it’s not always easy to meet all of these criteria.
The length of the process
Finding the right buyer takes time. As mentioned, this process can take up to two years to complete. Whether the company is a brick-and-mortar company or an eCommerce store, buyers are taking more time to comb through financials, ask questions, and investigate the inner workings of a company. Expect serious sellers to take some time to do their due diligence and make sure it’s the right decision.
What and when to tell employees
Employees are impacted by the sale of a company. It’s important to provide as much transparency about the sale including the timing of it and what it could mean for their job security.
While the owner shouldn’t go into specific details about the sale, it’s important to communicate with employees and keep them updated to avoid speculation, decreased morale, and company-wide panic.
Capital gains tax
After the sale of the business, the owner will pay a capital gains tax on the profits made. Speak with your accountant about this tax and know how much you stand to pay based on the asking price.
Financial plan for after the sale
As the owner, it’s important to have a plan in place for after the sale. Will you invest the money earned? Do you have a sound financial plan in place when the company revenue is no longer coming in? Will you be downsizing, moving, or switching jobs? All of these questions must be answered and their financial implications weighed.
How to sell a business
When it’s time to sell a business, there’s a series of steps that owners go through. To prepare for the process, here’s what owners should expect as they put an exit strategy in place:
Determine the value of the company
One of the first things on the list is to determine how much the company is worth. While an owner might have an ideal asking price in mind, it’s best to get a third party appraisal. There are business valuation companies whose sole purpose is to evaluate a business and determine its worth.
These companies examine sales, debt, inventory, assets, and provide a SWOT analysis. A SWOT analysis stands for strengths, weaknesses, opportunities, and threats. It’s an exercise that presents a clear picture of the company’s overall health.
Generally speaking, the value of your business is typically three to six times its annual cash flow.
Getting the business value accessed is the first step. The next step is to work with your accountant to present clear, day-to-day financials. Today’s buyers are more meticulous than ever, they want to see what kind of decisions have shaped the company.
To prepare, talk with your accountant to assemble the necessary financial statements. Many companies use accounting software that provides great organization, which will help. Buyers will likely ask for specific records, including:
- Income statement
- Cash flow statement
- Balance sheet
- Tax returns for three years
Work to get sales trending upward
Buyers will also ask for a record of sales year-to-date. Interested parties usually want to see a company with sales on the rise, rather than on the decline.
Ideally, the business sale is well-timed so sales are trending upward or there’s enough time built in to raise sales before putting the company on the market.
Businesses that have future appointments booked or those with a strong customer base of recurring clients can be used to leverage the asking price.
Get a broker
Small business owners typically use a business broker to facilitate the sale of their business. If a broker is brought on board, he or she will do the business valuation and work with the owner to bring the company to market.
A broker does charge a commission. Typically, the commission is 5-10% of the sale price.
The broker is the one who vets buyers, manages their questions, and communicates with the seller during the process.
Make sure the buyer is pre-qualified for a loan
One of the biggest reasons for a deal to fall apart is caused by a lack of funding by the buyer. While some prospective buyers come across as wealthy or confident in their funding source, it’s always best to work with pre-qualified buyers.
The buyer should be pre-qualified before the seller provides any serious information about the company. The idea is to make sure that sellers are only working with serious buyers.
As one would expect, the sale of a business comes with a lot of paperwork. Among the most important are the Asset Purchase Agreement and Bill of Sale, which is the legal document that transfers the company from one person to another. Talk with your lawyer to draw up the paperwork and review it before completion.
What you should know about a business broker
It’s possible to sell a business on your own, but many people choose to work with a business broker. To help owners understand their role, here are answers to frequently asked questions:
What does a business broker do?
Think of a business broker as a real estate agent. They can help you buy or sell a business, provide guidance on the process, identify potential buyers, promote the business, and help negotiate the sale.
What are the benefits of working with a broker?
The experience and guidance a broker provides can help owners position their business for sale. In addition, most owners work with a broker to manage the sale process so they can continue running the company.
How is a broker paid?
Brokers earn a commission, which is usually between 5-10% of the sale.
How do you hire a broker?
An owner researches possible options, conducts interviews, and makes the best choice possible. An owner should expect to interview 3-4 brokers to find the right fit. Be sure to ask for and call references and examine a broker’s track record for selling companies like yours.
Is confidentiality a priority?
Yes. Business brokers are skilled at marketing businesses without revealing its name. The idea is to keep the sale confidential and not tip off any competitors.
How is a business marketed?
A broker will use a variety of tools to market a company and will rely on their pool of contacts in the business to spread the word.
Mistakes to avoid during the sale
To make sure the sale goes smoothly, here are several mistakes to avoid:
Not learning the process
There is a process to selling a business. If you assume you can slap a price tag on the company and sell it tomorrow, you’re wrong. Get familiar with the entire process, which includes: valuation, engaging buyers, an offering memorandum, management meetings, negotiations, due diligence, and closing contracts.
Waiting too long to sell
Deciding to sell a company isn’t easy, but waiting too long can be costly. Some owners try to revive a company, fail, and then decide to sell it. Others hang on to a company for too long without innovating anything new and profits begin to decline. Both can hurt the sale of a business.
If selling enters your mind, start talking to merger and acquisition professionals about the process so you can maximize the profits of a sale.
Not having the documentation needed to defend the company
The best way to show what the business is worth is to offer extensive financial documents and be able to answer every question quickly and be up front about any problems.
Trying to hide information
While entertaining potential business buyers, don’t hide any information. It might seem beneficial to exaggerate numbers, distort sales, or cover up past litigation. However, doing so only hurts your reputation. Buyers want transparency and as they do their due diligence, the truth will likely come out. It’s best if the truth comes straight from the owner.
Failing to negotiate
This is a business deal. There will be a negotiation. Remember, this isn’t an emotional situation. Every owner thinks the business is worth more than it really is because of their connection to it. Stay focused on the business process at hand.
Not creating a transitional plan
What does the transition process look like? The new owner may ask the former owner to stay on in an advisory role for a few months to make sure the transition is smooth. It’s important to discuss what this process looks like and what’s best for the company’s continued success.
To help business owners on their quest to sell their company, here’s a list of additional resources to check out:
Articles on selling a business
- Is My Business Worth Selling?
- The Six Legal Steps to Sell a Business
- How to Choose the Right Business Broker
Sites to find a business broker
Books on selling a business