How to Sell Your Business

Building a business is difficult. If you’re a business owner, you already know that. You take major risks in starting it, and then ride the roller coaster along the way. But sooner or later, the day will come to sell your business. And when it does, you’ll probably find that it will be just as challenging as every other phase of your business has been.

It will help to be aware of what those challenges will be, and to be fully prepared to overcome them. That will not only help you to sell your business as quickly as possible, but also to get a fair price for it.

Get an Accurate Value of Your Business

As an owner, you might assume that the value of your business can be determined by your accountant. Your accountant, after all, prepares the financial statements on your business. But that person can only tell you what the book value of your business is (which is assets minus liabilities). That doesn’t give you a clue as to the market value of your business on sale.

The only way to reliably get a value of your business for sale purposes is to have an appraisal and valuation done by an industry specialist. That person will be qualified to adequately measure the various selling points of your business – the assets, cash flow, net profit, and intangible factors – especially within your particular industry, segment or market.

Your first step then in selling your business is to hook up with a reputable firm that does business valuations in your industry. That will be different for every industry as well. For example, a person who values restaurants probably won’t be a good candidate to appraise a landscaping business. Talk to your banker. It’s likely they will be able to put you in contact with someone reputable.

Be Ready to Furnish a Broker or Buyer with Important Financial Documents

Most business owners are understandably hesitant to supply financial information to third parties. But if you’re trying to sell your business, then you have to be fully prepared to open your books for inspection. You’ll need to be prepared to furnish this information to a business broker, prospective buyers, and the lenders for those buyers.

Documentation will contain profit and loss statements, balance sheets, and income tax returns for the past several years. Brokers and buyers may also be interested in specific information, such as your accounts receivable aging schedule.

You should begin getting these documents assembled in advance. In selling a business, you will have to provide them on short notice. Hesitation can create the impression that you’re trying to hide important information. Also be fully prepared to address any questions or concerns that an interested party has in any of the documents that you are providing.

Engage the Services of a Business Broker

In most cases, you won’t be able to contact a local real estate agent to sell your business. Business sales are very different than property sales, because each business is unique. The best person to sell your business will be a business broker who specializes in similar businesses. That person will not only understand your business better, but is also likely to have contacts who may be interested in buying it.

You can also try to sell the business yourself. This would involve marketing it in the local newspaper, in trade publications, and also online. For example, Craigslist would be a good starting point to sell a business online. You can even advertise there for free.

Be Prepared to Offer Financing

While it’s possible that you can get an all cash offer for your business, it’s fairly rare. Most buyers will want some type of financing on the purchase price.

There are two ways that you can handle this part.

The first is to hold the financing yourself. For example, let’s say that you’re selling your business for $500,000. The buyer may offer you $100,000 upfront, then request a loan arrangement for the balance of $400,000.

If you go the private financing route, your goal should be to accomplish the following three objectives:

  • Make sure that the loan arrangement is formal. Have a note prepared by a lawyer, that spells out the term, the interest rate, the monthly payment, and remedies for default.
  • Ask for the largest down payment possible. 40% or 50% would not be unreasonable. It will minimize the risk of the buyer defaulting on the loan.
  • Make the term of the loan as short as possible. The buyer may ask for a 10 year term, but you should push for no more than five years.

Holding a loan on a business is risky. If the buyer is not qualified to run the business, and sales decline dramatically, there may be no collateral to seize in the event of default.

The second way to handle the loan situation is by working out an arrangement with a bank. That would enable the buyer to purchase the business, while you walk away with the full purchase price – and no risk of default.

Start with your own bank – they already know your business and may be prepared to offer financing to a buyer. Run the idea by your banker, and see what kind of financing they might offer. If you don’t have a bank that you have a business relationship with, you should check around with banks in your area and see what’s available.

This may also work as an incentive in the sale of your business. The fact that you are able to offer bank financing on the sale will be a major selling point.

Plan for Your Exit from the Business

Selling a business is not remotely the same as retiring from a job. There will be loose ends that will need to be tied up before you make your final exit.

Here are some examples of the details that you will need to address before the sale:

  • Any loans or other obligations that are in your name personally will need to be either paid off or fully assumed by the buyer of your business.
  • You will have to decide if you will be willing to work in the business after the sale. This is a common term in small business sales. The new owners may want you to stay on for a year or longer, to provide either expertise, continuity, or both.
  • If you have any employees, they will need to be aware of the sale, and apprised of their own options.
  • You will need to inform important clients of the sale, and determine if they will remain after you’re gone.
  • Have a plan as to what you will do with your life after the sale. This is more important than it seems, since business owners are often emotionally tied to their businesses.

These are just some of the concerns that will need to be addressed in the sale of your business. A good way to handle this is to have a business succession plan prepared in advance. That will not only give you a list of everything that needs to be done, but it will give you plenty of time to develop it before the fact.

There’s a lot involved when you sell your business. Consider each of the steps above, and make sure that you’re prepared for whatever may happen.

 

Monroe Bank & Trust does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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