Business owners work hard to get their companies up and running. When it’s time to sell, they deserve to get paid for all that work. Selling a business and getting what it’s really worth can be tough, but with careful planning and a little professional help, business owners can expect to command a good price. Read on to find a step-by-step guide on how to prepare for selling a business.
Table of Contents
Step One: Find the Right Broker
Business brokers help their clients with every step of the selling process. They usually work on commission, so they have a vested interest in making sure business owners get what they deserve for all their hard work. Unless there’s already a qualified buyer lined up and he or she is a trusted family member or friend, get help selling your business. It will pay off in the end.
Step Two: Prepare an Exit Strategy
Small business owners should have an exit strategy in place well before they decide to sell. If the owner suddenly becomes ill, or adult children decide they no longer want to take over the business when the time comes, it can force owners to sell quickly and accept lower offers. Preparing for the worst by having an emergency plan established doesn’t mean business owners will have to sell if they’re not ready. It just helps to avoid unnecessary complications.
Creating an exit strategy can be as easy as finding a trusted employee who wants to take over running the business should the worst occur. If no one is available, at least take the time to delegate the responsibility for finding a broker and selling the business to a trusted friend or family member.
Step Three: Clean Up Financials
Today’s buyers expect transparency and perform due diligence before making offers on promising businesses. They’ll want to know everything about the business’ financial situation before making an offer. If the business owner has been cooking the books, or even writing off family vehicles as business expenses, it’s going to make finding a qualified buyer very difficult. It can take three to five years to establish a clean financial record, so early planning is key.
The best way for business owners to avoid throwing up red flags that could scare off qualified buyers is to work with an accountant to clean up financial statements and tax returns. Most buyers expect to receive at least three years’ worth of financial statements, and they expect all income and expenses to be accounted for. Expect to provide year-to-date results, as well.
Step Four: Boost Sales
Prospective buyers are much more interested in small businesses that have room to grow. If sales are in decline, don’t get ready to sell. Take whatever steps are necessary to draw in new customers or clients so that prospective buyers will understand the company’s worth and potential.
Buyers tend to get skittish if the bulk of a business’s revenue is derived from only a handful of clients, as well. If one client or customer accounts for over 20% of revenue, it’s time to diversify the customer base. The cost of increasing marketing and promotions will be worth it.
Some business owners also take the time to upgrade aging systems, push excess inventory, or even put up a fresh coat of paint. These additional steps can also create more buyer confidence.
Request a Third-Party Valuation
It’s important to start with reasonable expectations, and that requires knowing how much the business is really worth. The business broker can arrange an appointment with a qualified business valuation professional, but sellers should expect to pay a reasonable fee. The valuation expert will then consider everything from inventory and assets to sales and receivables, outstanding debt, liens, and potential threats or opportunities that might affect the business’s value.
Most small businesses are worth somewhere between three and six times their annual income. However, external factors like industry trends and market demand will also play a role. A business valuation will tell potential buyers what to expect when it comes to not just the business’s current performance, but also its future potential.
Step Five: Pre-Qualify Buyers
Most small business transactions require buyers to take out third-party loans. If a promising buyer is unable to secure financing, the whole deal can fall through, leaving business owners back at square one. Getting a great offer is exciting, but don’t let that excitement trump common sense. It’s always best to pre-qualify buyers before agreeing to the sale.
Keep in mind that banks often require sellers to provide some of the financing capital for small business transactions. Requiring sellers to put up some of the money ensures that they have a vested interest in the company’s ongoing success, even after the sale goes through. Plan for that additional expense.
Don’t stop at pre-qualifying buyers based on their financial situations. Make sure the buyer will be a good fit for the business’s niche and unique company culture. If the new owner plans to come in and change everything up, it could spell disaster not just for employees and customers or clients, but for the business. Vetting buyers carefully is the best way for sellers who are required to offer financing to protect their ongoing investments.
Step Six: Prepare Documents
Closing the deal on a business sale requires a lot of paperwork. Sellers will need to prepare a legal contract, an asset purchase agreement, lists of physical and intellectual property, and other information. The final documents can be up to 50 pages long. Many business owners include additional stipulations for buyers such as non-compete agreements, employee agreements, and guidelines for use of website domains. Work with the broker to make sure all the bases are covered before the closing date.
The Bottom Line
Most business owners assume that if they’ve gotten their companies up and running by themselves, selling them should be a breeze. Unfortunately, that’s rarely the case. The best way to make sure everything goes smoothly and sellers get what they deserve for their years or decades of hard work is to hire a qualified business broker.
