You’ve made the decision to sell your business, but what do you do?
Selling a business may be daunting, particularly when you’ve never gone through the procedure before. In addition to the time of sale as well as the details, there are a lot of things to think about prior to deciding.
In the beginning, you must be aware that it’s perfectly acceptable to sell your company. A lot of small-scale business owners have a hard time understanding this particularly if it’s a company that they’ve constructed from the ground up.
Businesses are sold by entrepreneurs for a broad variety of reasons. You may be ready to retire or are feeling overwhelmed or simply ready to start the next chapter in your life selling your business can be very satisfying.
If you choose the correct approach, profits could be used to fund your next venture or grant you that financial independence you’ve fantasized about.
As someone who has purchased and sold several businesses in my career, I understand the steps to sell your business in the correct way. I’ve simplified a complex procedure and simplified it into just five steps.
Step 1: Determine Your Business Value
The majority of entrepreneurs think they know what their company’s worth. However, in most cases, the value they think they have is far different from what it actually is.
If you decide to list the sale price that’s too excessively or low, you should get a valuation expert. A third-party appraisal will provide you with an accurate estimate of the worth of your business. If you pay a set amount (usually around a few thousand dollars) an appraiser who is qualified will determine the value of your business with a comprehensive report and supporting documentation.
The report could ultimately give credibility to your price, if potential buyers are unsure of the price. In the simplest sense the valuation report can provide a rough estimate of what you could expect.
If you’re not looking to engage an appraiser you can always determine the value yourself. In general there are three main methods of valuing an enterprise–cost approach and market approach and the intrinsic value method.
The third option, called “discounted cash flow” method is the simplest to apply. The majority of companies are worth between three and six times their current cash flow.
However there are many other aspects to consider in this article. Trends in the business world, business debt assets, business trends and companies similar to those to sell are only some of the examples you should consider.
However, whether you calculate the value yourself or hire an appraiser who is a third party, your appraisal might not be the final price for sale.
In the final analysis, a company is only worth what one is willing to pay. If you’re not satisfied with the price, it might not be the right time to sell your business but.
Imagine it as selling a house. The agent representing you in the real estate market can tell you what the property is worth however, the house could remain on the market for a long time at that price. It is possible that you will need to put some money into the home in order to achieve the highest value. The same principle is applicable to selling your company.
Step 2: Make sure your financials are in order
After you’ve identified the worth of the business It’s now time to arrange your financials. For some this is much simpler than for others.
Selling your business can put a lot of people watching your financial statements. Potential buyers, lawyers accountants, accountants and brokerages, third-party valuation agencies experts, and many others will be looking through your financial statements. To ensure that everything runs smoothly, your accounting must be flawless.
In the majority of situations, you’ll need submit at least the most recent three tax years’ returns along with precise accounting statements (balance sheet and income statement, as well as a the cash flow report).
In the event of any errors or mishaps, these documents could constitute a warning to prospective buyers. Any inconsistencies within your records might raise questions about your business even if they were just a genuine error.
Am I being misled? Are these numbers being used to hide something? Do I have to believe everything I’ve heard about the company This is the kind of thoughts that run through the minds of a buyer when mistakes are discovered in your financial statements.
The majority of small-sized businesses do not require the resources of an accountant or bookkeeper..
If you are in the latter category, I highly recommend hiring an expert in accounting to tidy up your accounting prior to putting the business up for sale. This will make life much simpler later on.
Step 3: Recruit an experienced Business Broker
There are two choices to think about when selling your business: either sell the business on your own or work with the services of a broker.
You may be able to sell the business by yourself if you’re selling to an individual in your family or someone who is trustworthy within your family. This could save you some money on brokerage costs.
For the majority of situations using a broker would be the best option.
There could be additional costs associated with this method? Absolutely. However, a broker can help you negotiate the most favorable price and also help you sell your business faster than you can by yourself. Remember that brokers earn a commissions. It’s in their best interests as well to also sell the company at the best price possible.
The broker typically comes up with their own value for the company. Then compare this with the estimate you received in step 1. While the two numbers aren’t exact but they should be similar.
If there’s a huge gap between the broker’s estimation and the appraisal provided to the appraiser you may need to seek a third opinion to determine which is more precise.
The broker you choose has plenty of years of experience in selling businesses, which is highly beneficial. Other typical duties of brokers include:
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- Finding the top buyers
- Selling the sale
- Maintain confidentiality
- Financing the deal
- Assist in negotiations
- Manage due diligence
Business Broker Options
Here are our recommendations for the top business brokers to help you sell your company:
- Bizbuysell.com – best for companies with Under $300,000.
- Businessexits.com – best for companies with more than $30 million to $300,000 in annual profits
- HL.com – best for businesses that earn more than $10 million in annual revenue
How much will this amount cost you? The price for the services of a business broker typically depends on the amount of money your company earns.
The standard principle is this: the higher your earnings, the less commission you pay to brokers.
A company with less than $1 million in annual revenue typically has to pay between 10 and 12 percent brokerage fee, while those with a revenue of more than $25 million typically pay between 2.5-4.5% range of commission. For businesses in the middle the spectrum, brokers tend to utilize an option called the Double Lehman commission model, rather than the flat percentage.
It is crucial to comprehend the model of commissions for brokers right from the beginning. If you’re not sure, ask questions. not sure. Some brokers may even ask for retainer charges however, you could get around that by offering a minimal commission.
Step 4: Find qualified Buyers
There are two main words in this process: pre-qualified buyers and the buyers (plural).
It’s a good idea to make numerous offers due to a variety of reasons. To begin it is possible that not all offers will be authentic. Selling your company requires you to divulge important information about your company. This information could mean millions to your competition.
There is a chance that your competitor or someone who is acting for a competitor could offer to look over your financial statements. Don’t divulge the information to anyone.
Most business transactions are secured by a third-party credit by the SBA. In certain instances banks will demand sellers to contribute a percentage of the financing. Don’t get excited by the initial offer and believe that the business will eventually be sold.
It takes an average of between six and eight months to sell a company.
Alongside an agent, you can employ an expert in sales to help speed up the process and to pre-qualify buyers.
Buyers can be classified into three categories:
- Individual buyers
- Strategic buyers
- Private equity companies
The kind of buyer making an offer can play a part in the time it takes to complete the deal. For instance, an individual buyer is likely to require an SBA-backed loan that could take as long as 90 days to approve while the private equity company might finance the purchase through its own funds.
Do not rush into accepting an offer immediately Don’t be a rush to accept an offer. It is possible to use one offer to gain leverage on another one, giving you the best return on your investment.
Step 5: Finish Legal Contracts and Documents
If you’ve located an appropriate buyer and have agreed to your offer, it’s now time to conclude the transaction.
This is when things could become a little chaotic and complicated. Therefore, you’ll want to let your lawyer take care of the bulk of this process.
Some of the common agreements and documents that come with business sales comprise:
- Purchase agreement
- Asset listings
- Noncompete agreements
- Guidelines for use of websites and Domain name
- Sale bill
- Security agreement
You can write a purchase contract and contract by yourself, however I’d strongly discourage doing that. There’s a high chance you’ll overlook crucial details and could be a victim of unforeseen events. The contracts could be upwards of 25-50pages.
In the event that your lawyer isn’t an expert in the law of contracts, they may be able refer you to an associate.
When everything is in order It’s an issue of crossing the T’s and crossing the I’s and finally, numerous Initials, signatures, and other forms.
Tips and best practices for Selling Your Company
While selling your business could be reduced to the five steps mentioned below, there’s some things you must do during the process.
Utilize these suggestions and the best practices to ensure the sale runs smoothly. This will help you receive the most profit for your company.
Boost Your Sales
As I mentioned before selling your business requires time. It isn’t possible to sell your business today and receive an offer by tomorrow.
I’ve witnessed many business owners who put all their efforts in selling their business that they forget about the company itself, even though they’re in the helm. You have to go every day to work and invest all your efforts towards increasing sales.
A strong sales performance will eventually increase the value of your business and will make it more attractive to potential buyers. On the other hand an increase or a stagnation in sales can be a major alarm for owners who are considering it.
It is crucial to be surrounded by individuals who can assist you navigate this journey. Your lawyer, broker and accountant manage their own responsibilities. This will allow you to have the time to focus on sales.
Create an Exit Strategy
Every business owner should have an exit plan. The most effective exit strategies are created prior to the time when making the choice to buy your business takes place.
This is something that you’ve been pondering for a while. A properly designed exit strategy can take some time to come up with. If you do not have an exit plan, is it not too late come up with one. However it’s not the right moment to sell your business.
The worst thing you could happen is to find yourself in a situation where you are pressured to sell your business. In that situation it’s highly unlikely that you’ll be able to sell your business for the highest value.
The unexpected can happen. Therefore, you should have a contingency plan to cover a wide array of possibilities for alternatives to exit.
What do you do if a large box store opens in your area? What will you do in the event that illness or age becomes an issue to your everyday life? What happens if your children do not wish to run the business? These are only some of the scenarios that could occur.
When the time comes you’re ready to sell you’ll have already prepared with a plan of exit.
Be Reasonable
Selling an enterprise can be very emotional. This is particularly relevant for family firms, small companies, or something you’ve created entirely on your own.
Many business owners feel immense pride in what they’ve done. Tears, sweat, blood and insomnia are things entrepreneurs share.
However, it’s important to stay clear of your emotions from the equation. Being emotionally involved can affect your thinking and choices.
Potential buyers don’t really care about how many hours you’ve spent every week over the last decade. They only care about the final result. If you believe the offer isn’t fair or low enough You can always refuse.
In certain instances it is possible for a competitor to offer a fair and legitimate offer, with the intent of purchasing. Do not let a past rivalry stop the deal from happening.
Receive a Cash Payment Up In the Front
Be sure that the terms of your contract call for the payment in advance. There are buyers who might offer you an attractive deal, but don’t have the money to make the payment today.
The idea of being paid in installments may seem like a small deal however, this arrangement may cause some issues for you in the future. There’s a chance that you’ll find yourself in an instance where you’re not receiving the payment according on the terms you signed. If that occurs then any legal recourse could simply be an additional cost for you.
Additionally the new owner might have to pay for the money needed to continue the business. If this happens it could mean that there won’t be any funds available in the event that the business goes under.
Let’s say you’ve got two offers that are serious to consider. One of them is for a larger amount, but it has the financing for a period of ten years. The second one is less however it will be paid in full. I’d highly recommend the first option.
Conclusion
Are you ready to sell your company? Do not overcomplicate the process The entire procedure can be broken down into five steps.
However, selling businesses requires time. Be realistic in terms of the cost and the time frame.
In some instances you may decide to hold off your sale till you improve your revenues and arrange your financials. If your business is performing well and is making a lot of money is more appealing to prospective buyers.
This guide can serve as a reference guide to help you through the procedure. Follow the guidelines and best practices I’ve provided above to ensure that you get the best price for the purchase of your business.
