Steps To Selling Your Business

How to Sell Your Business

You only sell your business once.  That thought may be enough to keep you up at night when you decide it’s time to cash in on your years of hard work as if there isn’t enough pressure associated with every step of the sale of a business.  But there’s much you can do to prepare for the sale, and it’s not a bad idea to start thinking about it long before the day arrives. I actually included planning for a year five equity event to happen in my business startups. 

While every transfer of business ownership is unique, there are some important questions that sellers should ask themselves.  A common process can be used for the sale of most small businesses. The more you prepare, the more successful the outcome is likely to be.  What follows is a brief outline of the process for small, closely held companies.  Many of these principles apply to larger transactions as well.

First, ask yourself three questions:

  • Can Your Business Be Sold?  Many elements of a business make it attractive to buyers.  For example, does it have: a solid history of profitability; a large and loyal base of customers; a competitive advantage (intellectual property rights, long-term contracts with clients, exclusive distributorships); opportunities for growth; a desirable location; a skilled work force?  The owner may complete a business SWOT analysis to expose some of the attractions that may appeal to a buyer while preparing the owner for those tough questions about what may not attract a buyer. 
  • Are You Ready to Sell?  Make sure you are ready, both financially and emotionally.  Think about what life will be like after the sale.  What will you do not just for money but also with your time?  Many business owners suffer real remorse after handing over their business to a new owner.  Here are a few indicators that it may be time to move on:
    • It’s not fun anymore. Burnout is a very real issue for business owners, and an entirely legitimate reason to sell.
    • You’re not inclined to invest in growth. You may be comfortable with the current size and profitability of your business and have no desire to make the capital expenditures necessary to take it to the next level.
    • You feel your management skills are overmatched.  It is not uncommon for business owners to build their business to a certain point and then realize they lack the skill set required to go further.
  • What’s Your Business Worth?  Many owners have no idea. Selling a business is both art and science, and in no other area is this more evident than the valuation. While every seller wants to achieve maximum value, setting an asking price that is too high signals to buyers that you may not be serious about selling.  While there are a number of methods used to value a business, the most common formula for smaller transactions is a multiple of seller’s discretionary earnings (S.D.E.).  This type of market-based valuation involves recasting profit-and-loss statements by adding back owner’s salary, perks and nonrecurring expenses to find the S.D.E. of the business and then using comparable data for similar businesses to arrive at an appropriate multiple. View my blog entitled Business Valuation Methods. Be sure to include in any valuation the expectations of your stakeholders. For instance, I knew my investors usually looked for a 30% return on their investment so I factored that into my valuation equation.

Prepare Your Business for Sale (Now!)

Investors will spend several months pouring over a company’s business records and market position. They will find the problems.  If business owners don’t have good answers, buyers can walk away or substantially lower deal pricing. Of course, when looking to sell a small business, the key to a lucrative sale is attracting interest from a number of potential business buyers or investors.  There are two types of buyers for prosperous businesses: financial buyers and strategic buyers. 

Financial buyers include private equity or “buy-out” funds that like to take controlling interests in companies that have the potential for another good growth spurt. Their typical investment horizon is three to five years, with IRR financial return objectives in the mid 30 range. 

Strategic buyers tend to be longer-term investors and can include the business employees or any business that would benefit operationally from owning all or a significant stake of a business. Often, strategic buyers are competitors, large customers or other businesses that need to expand their operating capabilities, intellectual property portfolio or customer relationships.

There is no way to overstate the intensity with which buyers will scrutinize your business.  Here are things you can do to prepare for it:

  • First, get your books in order.  Not being able to provide accurate financial statements in a timely manner can cause a deal to unravel in short order.  Be sure to have the following on hand before you go to market:
    • Last three years’ profit-and-loss statements.
    • Last three years’ balance sheets.
    • Year-to-date profit-and-loss statement.
    • Current balance sheet.
    • Last three years’ full tax returns.
    • List of furniture, fixtures end equipment.
    • List of inventories.
    • Commercial property appraisal or lease agreement.
  • Be ready to furnish other documentation particularly during the due diligence phase when you will probably be asked to produce insurance policies, employment agreements, customer contracts, lists of patents issued, equipment leases and bank statements.
  • Visit your accountant.  Every business in America has the federal government as a business partner. Before negotiating any deal with prospective buyers, it’s important to learn what types of transactions may boost your tax obligations.  Ask your accountant if it is more advantageous for you to sell the assets of your company (often a preference of business buyers to reduce the risk of buying hidden liabilities) or sell shares of company stock.
  • Prep your company for sale. In the same way home owners spruce up their homes before talking to rental agents, business owners benefit when they have the opportunity to unload unprofitable customers, cut unnecessary expenses, and build up areas of perceived business value.  Do everything you can to build consistency into your company’s financial and operating performance. Also make sure all tax obligations and filings are current and your accounting records are “clean” for potential buyer review. Make any needed cosmetic improvements to the premises, get rid of out-of-date inventory and make sure that equipment is in good working order. Part of the process of preparing a company for a sale is for business owners to be honest about company weaknesses long before potential buyers ask tough questions.

Select Your Support Team

Take good care interviewing law firms that will represent your company during sale negotiations. Also, if you decide to hire an investment banker to solicit potential buyers, make sure the intermediary has the prestige and expertise to represent your company well. The key to a good intermediary is smart deal positioning and the ability to get return phone calls.  Well respected investment bankers can also help owners sort through their options without any pressure to make fast decisions. The decision to sell a company or enter into long-term relationships with financial investors or strategic buyers is very personal.  It can’t be rushed.

Spread the Word

Develop a target list of acquirers. Even if your company will be represented by an investment banker, it’s helpful to think about likely candidates to buy your business long before you want to sell your business.  The purpose of developing this target list is to start thinking like a buyer.  What attributes of your business will make it more or less valuable to potential buyers?  Is it your operating facilities, know-how, ability to serve varied types of customers, or financial performance?  All buyers tend to bid up businesses with industry leading profitability and a narrow range of competitors.

Not surprisingly, most savvy buyers use the Internet to research available businesses for sale.  The two largest Web sites are BizBuySell.com and BizQuest.com.  Some sites specialize in selling certain kinds of businesses like franchises, internet properties or restaurants. Most of these sites charge a monthly subscription fee to advertise your business for sale.

There are two primary marketing materials that are typically used to describe your business to potential buyers. The first is a one-page document that offers highlights of the business without revealing its identity and is sometimes referred to as a “blind profile.”  The second is a comprehensive selling memorandum or prospectus that is sent to serious buyers who have signed a confidentiality agreement.

Make Sure Potential Buyers Are Qualified

There’s no bigger waste of time than working with a buyer who will not be able to complete a transaction.  Ideally, you will want all interested buyers to sign a confidentiality agreement before sending out anything other than the “blind profile” for your business.  In addition, you should require buyers to submit some basic information:

  • Name and all contact information.
  • Previous employment and business ownership.
  • Educational background.
  • Funds available to invest and sources of financing.
  • Minimum monthly income requirement.
  • Intended timeframe for completing a transaction.
  • Reason for interest in your business.

Negotiating the Deal

After you’ve found a qualified buyer, provided a selling memorandum and had an initial meeting, it will be time to stop the flow of information and ask that an offer be presented.  This can take the form of a non-binding letter of intent or a term sheet.  It should spell out the primary terms of a deal so that all parties can move forward in good faith.

All sellers hope to get a full-price cash offer for their business.  In the real world this rarely happens.  More often buyers will make a down payment and then pay some or all of the remainder in installments to either you or a lender.  Don’t be dismayed by an offer that doesn’t meet your original expectations.  A willingness to be creative with the terms of a transaction can go a long way toward a successful sale.  Be sure to enlist an accountant and a lawyer to help you assess the tax consequences of the terms you suggest or accept.

Selling a business is largely about setting realistic expectations, avoiding surprises and just plain hanging in there.  It can be an arduous journey, but one with a very tangible and rewarding light at the end of the tunnel.  Once you’ve successfully sold your business, savor an accomplishment that not every entrepreneur gets to enjoy.  Whether you’re lying on the beach, retiring by the lake or starting your next venture, you did it!

For more thoughts, search for the key wordsbuy business” and sell business“.

Copyright ©John Trenary 2022

Leave a Reply

%d bloggers like this: