How to Sell a Business
- Gather Necessary Documents
- Determine Fair Market Value of Business
- Boost Revenue
- Clean up the Finances
- Create an Exit Strategy
- List the Business for Sale
- Market the Business to Prospective Buyers
Roughly 7,600 businesses were sold in 2020, which is actually a 22 percent drop from the year before, when around 9,750 businesses were sold. Prior to that, business sales had been increasing year after year. However, there was a similar drop in 2009, when sales were reduced by 28 percent. Take note of the pattern: 2009 was the Great Recession and 2020 was the beginning of the Coronavirus Pandemic. This tells you that, like many other parts of the economy, buying and selling businesses slows down in a recession.
Of course, you may not be able to wait for the perfect time to sell your business. One of the most common reasons that a business owner sells their business is because they’re tired of running it. Other common reasons include family or health problems that prevent them from effectively running their business. Some business owners do sell their business because they are going to retire, or because they do not want or cannot compete against competitors. Other entrepreneurs capitalize on the increase in business value, and are perhaps even looking to leverage the sale toward starting a new venture.
Whatever your reasons for wanting to sell, you can do so by following these seven steps:
How to Sell a Business
1. Gather Necessary Documents
The first step to selling your business is to gather the necessary documentation. This is where it pays to hire a small business bookkeeper if your business is too small to have its own HR department.
Things like trademarks and patents, supplier contracts, real estate/rent agreements, and state and local licenses are just a few pieces of paperwork it’s good to have in order. Of course, there will be other paperwork related to the actual sale of your business, which is where a business broker and/or business lawyer come into play as helpful resources.
Potential purchasers are likely to ask about financial information, like the balance sheet or profit and loss statement, up front. But a potential business buyer is not always likely to ask about legal documents that are relevant to running your business behind the scenes, such as paperwork related to intellectual property or your HR handbook.
Even smaller businesses should have these types of documents. They may not be as thick and well packaged as the corporate literature of larger businesses, but having policies, procedures, and documentation lined up is not only good for running a business smoothly, it’s good to have on hand for interested buyers in case you decide to sell your business in the future.
2. Determine Fair Market Value of Business
If you were going to put a home on the market, you’d research comparable homes in the area to get a sense of its market value. The same is true for selling a business. You’ll want to not only look at what similar businesses are valued at, but also how much they sold for.
Of course, even if you do your homework with the comps (comparable businesses), small business owners are busy people, and may overlook considerations like intangible assets or tax returns that can impact the real value of their bottom line. Often, it’s helpful to bring in a third-party business valuation and advisory firm. These firms can review your business and its competition so you can put an accurate price on your company. These services aren’t cheap—fees typically cost several thousand dollars—but it can pay off during the sales process. Oftentimes, they will find that a business is worth about three to six times their annual cash flow.
Of course, they are assessing the value of the business based on factors like cash flow and the overall balance of assets versus liabilities, even ones like estimated taxes for the year in which you are selling your business. Strategic buyers may bring their own appraiser to assess the potential business ownership possibility they’re looking at, and any differences in their findings will probably be factored into a discussion of the deal structure.
3. Boost Revenue
Think about the ways in which you’d have an easier time finding the best buyer for your house—you know, the one who offers the highest price. You’d start by trying to increase its curb appeal.
The same is true for selling your business. You need to make your business looks healthy and vibrant if you’re going to get the highest bidder. Remember, businesses are typically worth three to six times their annual cash flow. Increase your cash flow, and you increase the value of your business.
Unfortunately, it can be easy to check out of being enthusiastically involved in business ownership, especially if you’re looking to make a quick exit. Do what you can to boost sales so you can exit your business with the money you deserve for all the work you put into it. If it’s too much of a burden, you can perhaps appoint a key employee in charge of this task, in return for additional compensation or the promise of a leadership role during the transition phase.
4. Clean up the Finances
What kind of outstanding debts does your business have? And what kind of contracts do you have in place with suppliers, landlords, customers, and service providers? These kinds of details call for transparency and clear record keeping going back three years.
You do not want to have any skeletons in the closet for a new owner to find, lest they decide to pursue legal options. But even if they don’t, surprises behind the financial statements they saw before buying the business can give you a bad reputation. If you’re an entrepreneur who is jumping to their next venture, you’ll want your reputation in the business world to be clean so that future ventures go smoothly.
Cleaning up your finances does not mean you have to pay off all your business debts. It just means you need to provide transparency in regards to the finances. But by the same token, you will make your business much more appealing if you do what you can to consolidate outstanding debts, pay up any back taxes, and make sure you are up to date with everything you owe, whether that means utility bills or payroll.
This is another area where it’s best to work with professional advisors from the get go, so schedule a free strategy consultation today!
5. Create an Exit Strategy
Creating an exit strategy involves a drafting roadmap for transitioning ownership. How will you notify employees of the change? How will suppliers be notified? Will customers be notified? Will the particulars of your HR department be the same (insurance, payroll, investment plans)? Many times, one of the best things an existing owner can do is designate qualified, existing employees to take on management roles as part of the transition.
While it may seem counterintuitive, creating contingency plans are an often overlooked part of setting up a business in the first place. Moreover, if you intend to keep business ownership in the family for generations to come, you will still need to create some kind of transition plan anyway, so it’s recommended that you create an exit strategy early and review it periodically to make sure it’s up to date.
For some businesses, part of the exit plan (when it’s sold to a qualified buyer) includes figuring out how to pay themselves a severance package so they have financial support until they fully transition into their next business venture or retirement.
6. List the Business for Sale
Once you’ve cleaned up the financials, boosted sales, secured an exit strategy, and gathered the necessary paperwork, it’s time to bite the bullet and list your business.
You can do this on one of the many online marketplaces that serve as business exchanges. You can even list it in the local classifieds as a turnkey business (one that’s ready to take over). But perhaps the easiest thing to do is hire a qualified broker to list the business for you, as well as represent you during interactions with potential business buyers. A broker can also screen for qualified buyers with high creditworthiness.
7. Market the Business to Prospective Buyers
Hiring a broker also helps with marketing the business to the right group of people While marketing has always likely been one of your business expenses, this time around you will probably be marketing to audience.
Social networks, like LinkedIn, are a great way to put the word out there. You can also reach out to people in your personal network, which includes customers and suppliers. In most cases, there is no harm done in publicly letting people know that you are looking to transition out of the business. Of course, there are some instances where you may want to keep the sale of the business confidential; you will have to use your discretion to determine if this is the best course of action for your situation.
How Long Does It Take for a Company to Sell?
The answer to this question depends on a variety of factors, including the business, the size of the business, the market, and the economy. Even so, the average business takes around 6six to nine months to sell. This includes one to three months to hammer out the final details of the sale.
Selling a Business Requires Careful Planning
Selling a business is a difficult decision. There are many reasons why a business owner will choose to let their business go. No matter what that reason is, selling a business requires a roadmap to make ensure you are doing it right and getting the value you deserve.
Selling a business may not be something you consider when setting it up, but it is something that you should think about as a contingency. You can learn more about this and other tips for setting up a business in our Structure Implementation Workshop.
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