In the life of most businesses, there will come a time you as the business owner will want (or need) to sell. You will get older, you may have plans to retire, or health issues may disrupt things. Whatever the motive, knowing how to sell your business will make the last chapter of your business a happy, satisfying conclusion to the story.
Selling a business is not a simple matter, unfortunately. It’s not like selling a piece of furniture. To sell someone a couch you need to find out what it is worth, clean it up and get it ready, and put it up for sale. Then when you get an offer you negotiate an agreeable price, scribble down how much it sold for and when, and walk away.
Pretty simple. And pretty much the same process (with minor exceptions) for selling a bike, a car, a barbecue, or a computer.
But selling a business is different. Yes, it requires those same steps – appraise, prepare, promote, and peddle – but each and every step demands FAR more attention to detail and accuracy is crucial. The process to sell a business is similar to starting a business in that you have to plan each phase and organize the operation with painstaking attention to every factor. It’s the only way to a successful outcome.
Here are the most basic, required steps to a prosperous sale of a business:
1. Gather Your Information
Many business owners get by with the bare minimum. They have a hazy idea of what’s in stock, all receipts go into a big box, and they think they know what they owe and when it’s due … You probably know what I’m talking about. Business on the fly, over the dashboard of a truck, or in the back of a closet. Cash in, cash out – hope it all works out.
That style of operation might work for a time running a business, but it won’t work selling a business. When you sell your business, in a sense, you are working for one person only: THE POTENTIAL BUYER. And that buyer makes the rules, not you.
The buyer will want exactly what you would want if you were buying. He or she will want records and documentation. He will want to know who paid what and when. She will want to know how much you owe and why it isn’t already paid. And much more. As a business owner and seller, you have to have all that information clearly and specifically laid out and available to a buyer.
Having all the information together in an organized fashion is so important to the sale because without it, you probably won’t sell your business and even if you do, you won’t get what it’s worth.
So the first step in learning how to sell your business is to gather all information – here’s a list of some of the most important items you will need:
- 3 year’s profit and loss statements
- 3 year’s tax returns
- accounts payable
- accounts receivable
- lists of vendors
- lists of customers
- lists of vehicles used in business
- lists of equipment and trade fixtures
- leasehold agreements
- business records, such as contract rights, licenses and permits, and intellectual property
2. Hire a Broker
As noted above, selling your business isn’t quite like selling other things – it’s immeasurably more complicated. As such, selling almost always warrants hiring a broker to handle the sale. A broker will perform several key functions that either cannot be done by the seller or won’t be done competently by the seller. They are:
- Business valuation – brokers are trained to value businesses. Some brokers are highly trained to do extremely detailed analysis of companies, but for the average main street business, this level of analysis is not necessary. Most businesses need a simple valuation based on comparable sales, industry standards, and business profitability. Sellers rarely have the knowledge to do this step accurately. And even if they do, because they are so close to the business, they tend to inject too much personal bias into the valuation, and it comes out overvalued.
- Business advertising – brokers are connected to various forms of advertising, some of which are not available to a seller. Brokers advertise on “business for sale” sites, which are linked to hundreds of other sites and give sellers a broad exposure. They are also typically in networks or associations with other brokers who work together to share information and give and receive leads. Beyond that, most all brokers have their own network of buyers and sellers, and can reach out to their circle to find buyers for their listings.
- Business selling – brokers are specially trained to handle the often difficult process of selling a business. Brokers coordinate sellers and buyers with escrow officers, attorneys, loan officers, and many other professionals. They navigate the various steps and give principals regular advice. And most importantly, brokers negotiate between the opposed goals of sellers and buyers and bring the sale to an agreeable closing.
A competent broker will bring a high level of professionalism to the sale, avoiding pitfalls and liabilities, gaining a higher selling price, and ultimately safeguarding the seller’s interests and satisfaction.
3. Value the Business
Just like any other item for sale, value will determine selling price. Value is a broad term, and can incorporate many variables, but without going into extreme detail about what will influence the selling price of your business, we will discuss the essential aspects.
- Income – income is by far the most important. In fact, it is many times more important than anything else. What a business makes in ANNUAL PROFIT is the main determination of what it will sell for. Yeah, there are some other influences, such as equipment value and patents and years in business, but if a business doesn’t make money, all that other stuff means little. A business will be valued by the annual net profits PLUS any add-backs. Add-backs are seller perks, or discretionary income. Under most circumstances, these include:
- depreciation and amortization
- owner salary and taxes
- company paid expenses which specifically benefit the owner: cell phones, auto, health insurance, etc.
- Equipment and Trade fixtures – the equipment and fixtures which are required by a business are normally figured into the overall value. How this is done varies considerably. But under most circumstances, if the business requires certain equipment to operate and that equipment has considerable value, it will figure into the overall valuation of the business.
- Goodwill – this is the intangible aspect of business value which is based upon the years in business or the brand. Technically, goodwill is any value above the value of the tangible assets of the business. In other words, it’s what the business makes because of “who it is”… it’s name. Some businesses have little to none – for example, a construction company that started up three months ago, while others have massive goodwill, such as McDonalds or GNC.
- Intellectual Property – most businesses don’t have any of this, while others only exist because of it. This can be anything from a patented product to a high profile website – an aspect of a business that is unique to and owned by that business and which generates revenue.
- Inventory – the inventory of a business (especially one that primarily sells products) will have an influence on value. In most business sales, the inventory will be valued at wholesale. Because it is difficult to track exactly what inventory will be there at closing, buyers will sometimes agree to do a count and pay cash for inventory on the day escrow closes.
4. Prepare the Business
Whenever you go to sell something, it usually needs a little work. Perhaps a dusting off, a shine, a wash. Likewise, a business needs a polishing before putting it on the storefront. And no one can do that better than the seller.
Because business can get a little messy, at any give time there is equipment that needs fixing, papers to be filed, accounts to be checked on, and so forth. When you are ready to sell a business, it is important to see what needs to be addressed BEFORE a buyer is looking and starts asking questions.
What needs to be addressed? The possibilities are endless, but here are a few of the more common:
- Accounts receivable – Is there a client who is always late, or has an ongoing balance that never seems to get resolved? This account will need a call, because once there is a buyer on the line, you don’t want to be chasing down receivables that should already be taken care of. It could look as if your business isn’t on top of things, which is something you don’t want your buyer to assume.
- Accounts payable – are there bills needing to be paid? Accounts overdue? The cleaner and tighter the business is when putting it on the market, the better it will look to a buyer. Payoff everything that is outside of your normal business credit account agreements, or anything that is past the due date.
- Paperwork – ah yes, the dreaded paperwork. If you are a procrastinator (like most of us), this would be a good time to catch up. Procrastination might be ok sometimes, but if it means showing a buyer a two foot deep box of invoices and receipts…it is a problem. The paperwork needs to be up to date and organized and filed.
- Inventory – every business has varying degrees of inventory. Of course some don’t have any. If your business has constantly changing inventory (which can also be equipment that is rented), before selling it is helpful to do a detailed count. Even if it changes considerably by the time the sale closes, knowing what is there gives a more accurate picture of value to the buyer.
5. Advertise the Business
As mentioned earlier, brokers will have many options to advertise the business for sale. Business for sale websites, broker websites, social media, print ads, direct mail, email marketing to buyers on a list, and others will all be used to find buyers for the business. Learning how to sell your business will include advertising your business in the best possible way by the best possible means.
Some brokers are exclusive to one type of business. For example, some brokers only sell restaurants. They are really, really good at selling them because they know all the peculiarities of selling restaurants AND they have a network of buyers who only want restaurants. Chances are, these brokers will know the best avenues for finding the right buyer for a restaurant sale.
Another key issue of advertising is buyer qualification. Sellers who have already tried to sell on their own will fully understand this issue. For any business for sale, you will have buyers come knocking who have no right to do so. Either they cannot buy the business or have none of the qualifications necessary to run the business (and so would make a bad prospect). This is one of the main jobs of a business broker: he has to screen buyers and get a profile on them so he can tell if they are worth pursuing. Any business seller will discover many potential buyers are not good prospects, and will waste her time if they are not qualified.
6. Transact the Sale
Most questions regarding how to sell your business surround the actual selling process. After all, selling is what it’s all about. All the work that goes into preparing and marketing the business is for nothing if it won’t sell. So transacting the sale properly is crucial to the process. As it will be shown, transacting the sale in the right way necessitates a qualified business broker.
There are 3 main areas of the sales transaction.
- Negotiation – Buyers and sellers of a business almost never want the same thing. The buyer wants cheap – the seller wants expensive. The buyer wants accounts receivable – but the seller wants accounts receivable. The buyers wants to take his time – the seller wants to sell fast. And so on. Negotiation is the interaction between the two opposing forces that finds common ground and gets the deal done. Sellers have to be ready and willing to negotiate if they want a good, clean sale. They rely on the business broker to negotiate for them and act as a buffer to soften the friction between the parties.
- Coordination – other professionals come into play in most business for sale deals. These might be escrow officers, lawyers, accountants, inspectors, bankers…the list goes on. In a business sale transaction, the seller has to be willing to work with all of these people to get the deal done. Typically, the business broker is the one point of contact to connect these different cogs in the wheel. But the seller (and the buyer) have to be ready and able to accommodate. Selling a business is such a monumental and personal event, brokers help sellers by bringing all the parts together, in the right time frame.
- Counsel – though not offering legal or tax advice (unless they are appropriately licensed), brokers are there to point the way. As professionals, they can and should see potential problems as the sale progresses. Selling a business, especially one that has consumed decades of the seller’s life, is a highly volatile, emotional event. No surprise there. One of the main benefits of a broker handling the sale is his neutrality; a broker cares about the business but doesn’t view it like the seller. He can separate himself from it and thus it is easier for him to react rationally, and he can counsel a seller to make decisions for the betterment of all parties to the deal.
7. Follow Through on the Sale
When a business finally sells, there is a sigh of relief. The road from preparing to sell and closing the deal is a long, arduous journey.
But in most situations, that is not the end of it. Sellers are often connected to buyers in several ways, even after closing. Here are some of the more frequent:
- Owner training period – owners normally agree to train buyers for a period of time – one to two months – as part of the sale agreement. Of course this varies according to the type of business, but in any case, sellers are involved to some degree as the buyer takes over operations. This is an important aspect of the sale, because every seller wants to see his buyer succeed. This period gives the buyer the boost to get things going.
- Seller carry notes – most business financing happens by the involvement of more than one financier. Commonly, cash from the buyer, a bank loan, and a seller carry-back note combine to fund the sale. When a seller carries back a note, in essence she is investing back into the company she just sold. Notes are typically 3 to 5 year terms, so for at least that amount of time, a seller is still “connected” to the sale of the business. While it may only be financial, the seller is with the business for at least the term of the note or until it is payed off.
- Ongoing consulting – some sellers find they are valuable to the business, even after it sells. In cases like these, the seller may stay on permanently, or even on an as-needed basis, to inject their wealth of experience and knowledge into the future development of the business. Most often agreements are put into place with compensation for the seller, which serves as a nice complement to his or her retirement.