7 Tips for Selling Your Small Business
The sale of a small business can be a long and complicated process that requires the assistance of outside help: an accountant, broker and possibly an attorney. The sale will probably take up a considerable amount of your time and energy as you attract the right type of buyers, handle all the paperwork and learn how to handle the profits wisely.
The outcome will depend on many factors: company value, timing, legal structure and finances involved. Consider the following 7 steps to make your small business sale easier.
1. Determine why you are selling your business.
This question is one of the first ones anyone interested in buying your business will ask. Why? They want to make sure you have a legitimate reason that does not signify that the business is struggling or failing. Below are a few of the most common reasons why someone would sell their company:
- You want to retire
- Ill health or death
- Strain and stress of working too hard
- Boredom or lack of interest in the company
- Disagreements between partners
You may want to sell your business if you are not making money with it, but this is not the best thing to tell potential buyers. Focus on the positive aspects of the business and its potential. Consider some of the following positive traits that will make the company attract more interested parties:
- Loyal customers and new markets opening up
- Steady income records
- Profit increase due to more sales or lowering costs
- Long-term contracts and business relationships
2. Focus on timing.
Selling a business takes more preparation than selling a product. It is recommended to start the process up to two years in advance. This gives you time to work on everything that will make your company more attractive to potential buyers: structure, customer base and finances.
Not only will a more profitable business result in a higher sales price for you, the tasks involved can make the transition to a new owner smoother for all involved.
3. Find out how much your business is really worth.
The easiest way to determine the true value of your company is to enlist the help of a business appraiser. Their experience will allow them to create a detailed report describing how much your company could possibly sell for.
You do not want to ask for either too much or too little when trying to sell your small business. Not only will this appraisal help you start the sale at the proper amount, it will also give potential buyers an independent review of the quality of the offer.
4. Consider using a broker.
If you are selling your company to a trusted friend, family member or an existing employee of the company, it might be a great idea to sell the company yourself. This helps you realize a greater profit since no broker commissions will cut into it. However, since business brokers earn that commission, it is in their best interests to get you the maximum amount of money for your business.
Using a broker can also leave you free to do the normal tasks required to keep the company running. Talk to a few brokers before deciding on the one you think will do the best job. Constant communication is a must so the business sale goes smoothly.
5. Ensure you have the proper documentation.
Gather your financial statements and tax returns dating back three to four years and review them with an accountant. In addition, develop a list of equipment that’s being sold with the business.
Also, create a list of contacts related to sales transactions and supplies, and dig up any relevant paperwork such as your current lease. Create copies of these documents to distribute to financially qualified potential buyers.
Your information packet should also provide a summary describing how the business is conducted and/or an up-to-date operating manual. You’ll also want to make sure the business is presentable. Any areas of the business or equipment that are broken or run down should be fixed or replaced prior to the sale.
6. Find quality buyers.
SCORE, an entrepreneurial nonprofit associated with the US Small Business Administration, states that business sales usually take from 6 months to 2 years to complete. Invest in quality advertising so you get the sale information in front of the most targeted people.
After you have grabbed the interest of a few possible buyers, forge ahead toward a sale with these tips:
- Line up more than one potential buyer in case negotiations fall through.
- Always maintain contact with them to update and gauge interest.
- Check the financial status and pre-qualification of potential buyers. You may decide to finance the sale yourself. Consult an accountant or attorney for help.
- Be prepared to negotiate the price, but do not stray far from the appraiser’s value and your desired reasonable sale price.
- Get everything in writing. Remember to use a nondisclosure agreement so the potential buyers cannot discuss your business or the sale with other parties.
- Use escrow once you get a signed agreement to purchase the business.
After the sale is complete, you should retain the following documents: the bill of sale transferring the company to the new owner, lease assignments if applicable and a security agreement in case of any seller-held liens on the business.
Some buyers may want a noncompete agreement as well. This means you would not be able to start a similar business in the area that could steal the old company’s customers or clients.
7. Learn how to handle the profits wisely.
Once the sale is complete and all that money is completely in your control take a while before spending it. Impulse buys during this time could destroy any retirement plans or reasons you had to sell the company in the first place.
First, study the tax laws to see what you will need to pay with the sudden influx of wealth. Next, make an appointment with a financial assistant or planner to learn about investment options and long-term income for retirement.
Putting your business up for sale not only takes a lot of professional planning. It can also be personally challenging and stir up emotions. If you have a good reason to sell and the market for companies like yours is hot, it can make the process easier.
Consider professional counseling from SCORE, the Small Business Administration and your local commerce organizations. In the end, the freedom and large sum of money you get from the sale will make it all worthwhile in the end.