Starting a business is a major life decision, but for small business owners, deciding when and how to sell the business may be even more consequential. Before selling a business, the owner is likely to carefully consider the timing and other important decisions: How do I get started? Is the market right? What price should I set for my business, and is it the “right” value? Before you put up the proverbial “for sale” sign, consider the following:
- The why. Thinking about selling your business—and exchanging the long hours and stress for a financial return—is exciting. However, you should reflect on your reasons for selling the business, not only for yourself but also because prospective buyers will want to know. Some common reasons for selling include retirement, illness, disputes among multiple owners, or a desire for a life change. Make sure that you understand why you want to sell your business and are confident about your decision before taking too many steps forward. You do not want to realize too late that the one thing you are most passionate about is no longer yours.
- The when. Choosing when to sell is another major decision. Ideally, a business owner will begin to prepare for the sale of a business as early as possible. It is wise to begin at least a year ahead of time. Having ample time to prepare will allow you to improve the business’s financial structure and internal processes, which in turn will increase the business’s attractiveness to buyers and the sales price. Note that it is important for every business owner to have a written business succession plan that specifies who will take over day-to-day operations if certain unpredictable triggering events, such as death or disability, occur.
- How much. Determining the business’s value can be very difficult. The valuation should take into account the business’s goodwill, intellectual property, cash flow, customer base, and financial statements. Your operating agreement can specify the method of calculation for the valuation or how a valuation is to be made. Obtaining a qualified business appraiser’s assistance is time and money well spent. The business appraiser’s role is not only to establish the value of the business but also to provide a detailed explanation justifying that value. The business appraisal will be used to set a sales price and provide prospective buyers with reasoned support for it.
- Involve the experts. In addition to an appraiser, you should also consider involving several other experts as you prepare for the sale. First, determine whether you need to obtain a reputable business broker with experience in your industry. A broker charges a fee to help you sell the business but may be able to obtain a higher price for the business and save you time. The broker represents you in the process of selling your business and will work with other experts, such as your lawyer and certified public accountant (CPA). In addition, you should find a local lawyer who is familiar with sales of your type of business to draft all of the necessary legal documents and ensure that all government and industry-specific regulations are followed. A CPA familiar with the sale and valuation of small businesses can facilitate the sale by ensuring that your business’s financial information is accurate. In addition, the CPA can advise you about the tax implications of the sale and complete any necessary tax filings. Make sure that you communicate your expectations and goals to all experts involved in the sale and stay in contact with them throughout the process.
- Compile documents. Most potential buyers want to review several years of financial documents before making an offer. Before the sale, gather financial statements, tax returns, and all relevant legal documents, including employment agreements. Make a detailed list of the inventory, customers, and any real estate or current lease agreements. Ensure that any potential buyer signs a nondisclosure agreement before they review these documents to protect your trade secrets and proprietary information. Make a detailed list of what is (and is not) being conveyed as part of the sale. Such documents are also necessary to help you and your attorney prepare a sales agreement for the potential buyer.
- Employees. Your employees have helped your business succeed, and it is important to consider how the sale will impact them. Would you like to offer them job security after the company has been sold? Will the employees with the know-how and customer relationships agree to stay on after the sale to work for the new owner? Consider how to include key employees in the process and perhaps ask them to sign stay bonus agreements to encourage them to remain with the business for a specific period of time after the sale.
- The sale. Ideally, you will receive several offers from potential buyers so you can negotiate the highest and best price for your business. The buyers will need time to review and verify your financials. By this point, you have spent time with your experts getting your business “house” in order for the potential buyers. Now, the buyers need to do their due diligence, so it is important to prepare to answer their questions. Involve your experts in this process. Lean on them to guide you over the finish line.
Establishing and running a successful small business is an extremely rewarding experience. Deciding to sell the business can be complicated, but with the help of experienced professionals, you can smoothly transition ownership of your small business—and begin the next chapter of your life. Call our office today to set up an appointment so we can discuss the steps toward making your prospective sale a reality.