Are You Ready to Sell Your Business?
Make sure you are ready, both financially and emotionally. Think about what life will be like after the sale. What will you do with your time? Will you have the financial resources necessary for your next stage of life? What net prodeeds amount will you work for you after giving consideration to all of the costs of selling your business? Will that amount be sufficient to allow you to accomplish your business sale objective? Engaging a tax professional to help you with the analysis is extremely valuable.
Understanding Your Value Proposition
Many elements of a business make it attractive and build value in the eyes of the buyer. For example, does it have a solid history of profitability, a large, diversified, and loyal base of customers, a competitive advantage (product or service superiority), barriers to entry (intellectual property rights, long-term contracts with clients, exclusive distributorships), opportunities for growth, a desirable location and a skilled work force? Have you built a team capable of success once you’ve left the business? Will the business run successfully without you present?
Preparing Your Business for Sale
Get your books in order. You will need the following before you go to market:
- Last three years’ profit-and-loss statements.
- Year-to-date profit-and-loss statement.
- Current balance sheet.
- Last three years’ full tax returns.
- List of furniture, fixtures and equipment.
- List of inventories.
- Copy of your lease agreement (or appraisal if selling real estate).
- Backlog (if manufacturer), contracts of future business, etc.
Be ready to furnish other documentation during the due diligence phase when you will probably be asked to produce insurance policies, employment agreements, customer and vendor contracts, lists of patents issued, equipment leases and bank statements.
You will also want to clean up your business to make it attractive to buyers. Make any needed improvements to the premises, get rid of outdated inventory and make sure that equipment is in good working order.
Utilizing a Business Broker
Now that you’re prepared to sell your business, your next decision, is whether to use a business broker or not.
Here are a few questions to ask when visiting with business brokers.
- Please tell me about you and your firm?
- How will you market my business?
- Do you cooperate with other business brokers?
- Will you display my business on business brokerage Internet sites?
- Can you provide references?
- How will you value my business?
- May I have a sample copy of your listing agreement?
- Are you affiliated with any business brokerage associations or trade groups?
Business brokers should be able to bring you prospective buyers that you would not be able to get on your own. Most brokers will ask for at least a one-year exclusive listing agreement. This means that any disposition of the business will entitle the brokerage firm to their fee. Commission rates will normally vary between 10 to 12 percent, but they are, by law, negotiable. Many firms also have a minimum fee for small businesses. Some may ask for a small retainer or up-front fee or advertising costs.
A good business broker will assist you throughout the remainder of the process outlined below.
Business Valuation
Selling a business is both art and science, and in no other area is this more evident than the business valuation. While every seller wants to achieve maximum value, setting an asking price that is too high might signal to buyers that you may not be serious about selling.
While there are a number of methods used to value a business, the most common formula for smaller transactions is a multiple of seller’s discretionary earnings (S.D.E.). This type of market-based valuation involves recasting profit-and-loss statements by adding back interest, taxes, depreciation and amortization to arrive at Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).Now add back discretionary items such as owner’s salary, perks, and nonrecurring expenses resulting in the S.D.E. of the business.
Now it is time to arrive at an appropriate multiple. A number of variables play into arriving at an appropriate multiple including:
- Continued earnings risk
- Company history and stability
- Growth projections
- Past earnings momentum
- Competition
- Cost of business expansion
- Barriers to entry
- Customer concentrations
- Management and key employee retention
- Location desirability and continuation
- Facility operational efficiencies
- Capital expenditures
- Financing availability
- Industry strength
- Environmental risk
- Alternative investment returns
- Economic conditions
This is where a professional business broker can provide assistance to assessing your business in these terms and providing an appropriate multiple.
It is also important to realize that buyers are willing to pay more for a larger discretionary earnings flow. For example a business generating a $1M cash flow will almost always generate a higher multiple than a business generating $100,000.
Another popular method of valuation is the Asset approach. This is more prevalent in industries requiring a lot of equipment and machinery. This method values the assets and liabilities based on a fair market value and includes any intangible assets and contingent liabilities and the business valuation is derived based on these factors.
Prepare Your Marketing Package
There are two primary marketing materials that are used to describe your business to potential buyers. The first is a one-page document that offers highlights of the business without revealing its identity and is sometimes referred to as a “blind ad.” These “blind ads” are used to generate interest without creating any possible negative consequences with employees, suppliers, customers, or competitors.
The second is a comprehensive selling prospectus or business profile to be sent to serious buyers who have signed a confidentiality agreement. It is important to include photos (a picture is worth 1,000 words) of major assets, buildings, products, etc. The business profile should provide a comprehensive overview of the business including structure of the business, opportunities for growth, competitive advantages, personnel summaries, requirements for licensing, financial results, an equipment list, licensing requirements, reasons for selling, terms and conditions of the sale, seller financing, and potential buyer profiles.
Marketing Plan
After your marketing package is complete, you and your broker should set up a process to target and qualify buyer prospects.
Advertising on Websites- Fewer than 5% of the general population are prospective business buyers, so focus only on the established ‘business for sale’ advertising venues that this 5% is following. There are a number of websites that cater to these buyers. Don’t expect your broker to run a massive ad campaign. It isn’t required or effective. Ads should be tested carefully and slowly. They should be “blind ads” where the identity of the company is protected.
Targeted Campaigns- Often times the buyer may be a competitor, supplier, or customer. There are several ways to approach these potential buyers. A direct mail or email campaign targeting these business owners/leaders can be an effective method to “get the word out”. Again, be careful to use “blind ads” to protect the identity of the company until a confidentiality agreement is in place.
Qualifying Buyers
If you don’t have a process to qualify prospects, you may find yourself dealing with tire-kickers, wasting lots of time and resources trying to sell them your business. There’s no bigger waste of time than working with a buyer who will not be able to complete a transaction.
In addition, you should require buyers to submit some basic information:
- Name and all contact information.
- Previous employment and business ownership.
- Educational background.
- Funds available to invest and sources of financing.
- Minimum monthly income requirement.
- Intended timeframe for completing a transaction.
- Reason for interest in your business.
Your business broker should have a process in place for qualifying buyers.
Site Visit
Once a buyer has been qualified, signed a confidentiality agreement, reviewed your business profile, and shows continued interest; the next step is typically a site visit.
I suggest that these visits be scheduled after hours for confidentiality and to allow you to focus on the buyer. This is your one chance to “sell your business” so it is imperative that you be on top of your game. A tour is usually the best way to start the site visit as it will generate a lot of good questions and give you an opportunity to present your business in a favorable light.
It is highly recommended that your business broker be there to document disclosures made between seller and buyer and to answer any questions relating to terms and conditions and the process should it continue.
Negotiating the Deal
After you’ve found a qualified buyer, provided a business profile and had an initial site visit, it is time to stop the flow of information and ask that an offer be presented. This can take the form of a nonbinding letter of intent or a written offer. It should spell out the terms of the deal so that all parties can move forward in good faith.
All sellers hope to get a full-price cash offer for their business. But in the real world this rarely happens. More often buyers will make a down payment and pay the remainder in installments to either you or a lender. Don’t be disappointed by an offer that doesn’t meet your expectations. It is not uncommon to counter-offer the original offer. A willingness to be creative with the terms of a transaction can go a long way toward a successful sale. Your business broker can be the creative “glue” that holds the deal together. Also, be sure to enlist your accountant to help you assess the tax consequences of the terms you accept.
Once the terms have been agreed upon by both parties (offer and acceptance) it is time to open an escrow account. Your business broker can walk you through the escrow process, costs, and timeline. Depending on the complexities of the deal, plan on allowing approximately 30 to 60 days to close escrow.
Navigating the escrow closing process takes careful attention and daily follow up. This is where a skilled business intermediary or broker can really help. As the say goes: ‘Nothing happens until the sale is final.” Business sale transactions can easily fall apart during the escrow period unless momentum to close the transaction is sustained by careful attention to detail