Selling a small business can be a daunting prospect. Whether you’re retiring, moving to a new town, or starting another venture, the amount you receive from the sale and the structuring of the deal will greatly impact your future. The following eight tips will help ensure that you seal a deal with the optimal price and conditions for you and your goals.
8 Things to Keep in Mind When Selling a Small Business
1. Prepare at Least a Year in Advance
When selling a business, you never want to feel in a rush. The whole operation will require plenty of planning, ideally beginning a year or two beforehand.
This will give you time to find the right broker and financial advisers. You’ll probably need a year or more to tidy up your financial records, improve the presentation of your systems and customer databases, and generally make your business as attractive as possible to potential buyers. Perhaps most importantly, you’ll have time to prepare emotionally for the sale.
2. Get Your Finances in Order
Your business may have been a personal project of passion for you, but a buyer only cares about one thing: the numbers. These days, buyers carry out intensive due diligence on all the financials. They expect complete transparency and have a keen nose for red flags such as disorganized or incomplete financial records.
With your accountant’s help, prepare to present tax returns and financial statements for at least the previous three years. Even your year-to-date results will likely be asked for. You’ll need to be able to explain it all clearly and confidently. Also, prepare future growth projections, key industry metrics, post-close cashflow planning, and any other figures that can help make the deal as enticing as possible.
3. Choose Your Advisers Wisely
It’s likely you haven’t sold a business before, and you only get one chance to get the best price possible. A good team of advisers will demystify the process, guide you through it, and help you make optimal decisions. First and foremost, consider hiring a broker who can evaluate your business, create a prospectus, pre-qualify buyers, and use their experience, expertise, and established networks to sell your business for the best price possible.
Other important advisers include an accountant, financial adviser, tax adviser, valuation expert, transaction attorney, and estate-planning attorney. These specialists help you deal with the many complexities of preparing, structuring, and navigating a deal.
4. Determine the Value of Your Business
When it comes to your business valuation, you might already have a figure in mind. But it’s always worth getting a third-party opinion from a specialist who knows the markets. A qualified valuation professional, perhaps organized through your broker, can value your business.
Most small businesses are valued at three to six times their annual cash flow, depending on many variables. A valuation expert will usually charge $3,000 to $8,000 to review your business and its place in the industry fully. They’ll take into consideration the company’s financial health, looking at inventories, receivables, outstanding liabilities, assets, and more. They’ll also examine current market demand, existing competitors, comparable sales, and overall industry trends.
5. Define Your Desired Outcome
With an accurate valuation in hand, you now know the selling price to aim for. In addition to this, you should define your desired overall outcome based on your longer-term financial needs and lifestyle goals. Consider if you’re willing to continue working at the business during a transition period and for how long. Other factors include any non-compete period as part of the deal, and if you care about changes the new owner makes to the brand post-sale.
As you prepare, also determine whether you want to sell all of your business at once or if you’d accept a partial sale. Decide if you want a lump sum in cash, if you’d accept installment payments, and how much you want as a down payment. A good financial adviser, CPA, and M&A attorney can help you work all this out. They can explain the advantages and drawbacks of various deal structures, including the differing tax implications.
6. Prepare Your Negotiation Strategy
When it comes to negotiating, the most prepared party usually fares best. So prepare yourself mentally and strategically for the entire process. You’re already starting in a strong position by not being rushed and having a proper valuation of your business. Decide on your asking price, leave a little room for movement, but know the minimal price you’re willing to accept and prepare to stand firm on that price.
It’s also a good idea to find a few potential buyers in case the first offer falls through. As with selling a house, multiple interested buyers also create competition that can push up the price and strengthen your hand. Finally, prepare for an emotional rollercoaster and commit to holding your feelings in check: a strong team of advisers will help you maintain clear-minded objectivity.
Have a Broker Negotiate for You
Fortunately, a good broker with a proven track record can do most of the negotiating for you. As a broker typically charges five or ten percent of the final sale price, their motivation should align with yours: to obtain the highest price possible.
But as with real estate agents, beware of brokers who only look to go through as many sales as they can as quickly as they can to rack up lots of commissions. This kind of broker won’t fight hard for the highest price. When interviewing brokers, ask for referrals and details of their past deals, and also try to gauge their level of personal interest in your deal.
7. Pre-Qualify Potential Buyers
It’s an unfortunate fact that many small business purchase deals fall through. This is something you should prepare for. It’s best not to become over-excited by an offer; nothing’s certain until the money’s in your bank account.
One reason many deals don’t work out is that they’re partially funded by a third-party loan. You can mitigate this risk by pre-qualifying all interested parties to make sure they have good enough credit for lender approval. Even in your initial advert, stipulate what information will and won’t be disclosed before a potential buyer is pre-qualified and has signed a nondisclosure agreement. Your broker can also handle this whole process for you.
8. Put Any Agreements in Writing
Make sure to get any purchase offers in writing. This means a signed letter of intent outlining the full purchase proposal. Unless you know the individual well, it’s best not to take someone at their word alone, especially given the complexity of a business purchase deal.
A letter of intent should include the buyer’s proposed price and payment structure, your ongoing involvement in the business post-sale, any possible warranties, and all other terms and conditions of the purchase. With this document in hand, you have a foundation upon which to proceed with negotiations.
Selling a small business doesn’t need to be difficult. Contact us at ASA Ventures Group for help selling your business at the price and terms you desire. With brokerage services, legal and financial specialists, and an extensive buyer pool, we can help you exit your business successfully and profitably with minimal hassle.
