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Tips for Selling Your Business - Legal Start Blog

Tips for Selling Your Business

Since every business ownership transfer is unique, sellers should ask themselves some important questions. There is also a common process for the sale of most small businesses. The more informed and prepared you are for the process, the more successful and less stressful the outcome of the sale can be. The following is a brief outline for the sale process of small, closely held companies. In some situations the principles can also apply to larger companies.

sell your business

Three questions you should ask yourself before starting to sell your business:

1. Can Your Business Be Sold?

There are different elements of a business that make it attractive for buyers. For example, does it have a profitable history, a customer base that is loyal to the brand, an advantage over competitors (intellectual property rights, long-term contracts, exclusive distributorship), a solid foundation for growth, skilled employees and a desirable location.

2. Are You ready to Sell?

One of the most important questions to ask yourself when thinking about selling a business. You have to be emotionally ready to let go of your hard work. Also financially stable since the income from your business will stop once it has been sold. Some business owners suffer real remorse after the sale of there business to a new owner.

Here are some indicators the it might be time to sell:

  1. You’re not having fun running the business anymore or you’re burned out. These are entirely legitimate reasons to sell your business.
  2. You might be happy with the size and profits of the company and don’t want to invest any more capital into growing and expanding the business.
  3. You might have build the business to a point that you’re not able to manage it efficiently anymore. It is not uncommon for owners to grow their business to a certain size and then realize that they lack the skill set to manage it efficiently.

3. What is Your Business Worth?

It is an art and science to sell a business. In no other area is this more evident than the valuation. Every seller wants to sell at the maximum value. But setting an asking price that is to high could signal the buyer that you may not be serious about selling.

There are a couple of different methods to value a business, but the most common formula for smaller transactions is a multiple of seller’s discretionary earnings also known as S.D.E. Using this type of market-based valuation, to find the S.D.E. involves recasting profit and loss statements, adding back owner’s salary, perks and nonrecurring expenses and then using comparable data for similar companies to calculate an appropriate multiple.

Prepare You Business for Sale

Buyers will scrutinize your business, but there are some things you can do to stay ahead.

First make sure all your books are in order. If you are not able to provide financial statements in a timely manner the deal could fall apart.

Before you go to market make sure you have the following ready to go.

  • Last three years profit and loss statements.
  • Last three years balance sheet.
  • 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.
  • Commercial property appraisal or lease agreement

Also making sure your business looks attractive to the buyer by sprucing it up. If needed make some cosmetic improvements, make sure your equipment is in good condition and in good working order, get rid of any outdated inventory.

Spread the Word

There are two primary marketing materials that are typically used to describe your business to potential buyers. The first is the “blind profile”, a one page document that offers a description and highlights of the business without revealing the business identity. The second is a comprehensive selling memorandum or prospectus that is send to serious buyers who have signed a confidentiality agreement.

Make Sure Potential Buyers Are Qualified

Make sure the buyer is able to complete the transaction, there is no bigger waste of your time the dealing with an unserious buyer who can not pay at the end. The best thing you can do is to have all interested buyers sign a confidentiality agreement before sending out any information about your business, other then the “blind profile”. You should also require the 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.

Negotiating the Deal

After finding a buyer, provided a selling memorandum and had your initial meeting with them, it will be time to have an offer presented to you. This can be done by a non binding letter of intent or by the use of a term sheet. The primary terms of the deal should be spelled out clearly so that both parties can move forward in good faith.

Even though all sellers hope for a full price cash offer, in the real world this happens very rarely. Usually buyers make a down payment and then the remainder in installments to you or the lender. Don’t be disappointed if the offer does not meet your original expectations. As this case illustrates, a willingness to be creative with the terms of a transaction can go a long way toward a successful sale. Make sure you enlist an accountant and a lawyer to help you assess the tax consequences of the terms you suggest or accept.

Have realistic expectations when selling your business, this will avoid surprises and headaches during the process. It can be a stressful journey when selling your business but at the end it can be very tangible and rewarding. Once you’ve successfully sold your business, savor an accomplishment that not every entrepreneur gets to enjoy. Whether you’re lying on the beach, retiring by the lake or starting your next venture, you did it!

About the Author

Taylor Stewart is a writer, speaker, and entrepreneur from New York.

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