Photo by @gabriellefaithhenderson
Being a business owner is a lifelong dream for many people. However, despite the blood, sweat, and tears of finally making this dream come true, there will inevitably come a day when it comes time to sell your business. Perhaps a market opportunity comes along that is simply too good to pass up, or you simply no longer have the time to run a business effectively. Whatever the case, whether you are looking into how to sell a franchise or a business you have started from scratch, the following breakdown will give you everything you need to know to prepare your business for sale.
1. Get the Financials in Order
Many business owners use their business as a means of funding their lifestyle. They simply pay their bills when they come due and keep the leftover to pay themselves.
While this process may work for an owner who is deeply embedded in the machinations of the business, a much more organized approach is necessary to appeal to outside entities. Buyers will be looking for some key financial statements when assessing your business. As such, the owner must accurately put together the following financial documents:
Tax returns for the previous three years
Balance sheets and income statements for the previous three years
Statement of discretionary income and cash flow for the previous three years (this is a particularly important document, as most buyers’ primary concern is a business’ ability to create cash)
Financial trends and ratios
Aging reports for accounts payable and accounts receivable
Inventory report with valuation of capital assets
2. Receive a Professional Valuation
It can be extremely difficult to quantify the value of a business for the original owner. After all, the business represents all of your hopes, dreams, risk, innovation, and hard work. There is no way that these things can ever be represented by a price tag.
Nonetheless, these factors will not resonate with prospective buyers in the same way they do the original owner. Buyers are going to be strictly interested in your business’ ability to generate profit.
To arrive at a reasonable figure for what your business is worth, it is beneficial to work with a professional consultant. In addition to factoring in the aforementioned financial documents, some factors that will be included in a professional valuation include:
Analysis of the business’ management
Capital structure
Future earnings prospects
Market value of the company’s assets
By having an objective, third-party professional perform a valuation, you give yourself the best chance of listing your business at a reasonable price and not seeing it sit on the market for years without generating interest.
3. Work With a Business Broker
When seeking help for how to value a business, you are likely to stumble upon a professional known as a business broker. While many business brokers are experts in business valuation, they can do far more for you during the selling process than arriving at a reasonable figure.
Business brokers are professionals in the buying and selling of businesses. They are extremely useful, in particular, for small business owners who are navigating a business sale for the first time. Some of the services performed by a business broker include:
Negotiation - similar to a real estate agent, a business broker is trained to interact with buyers, sell them on all of the benefits of your business, and negotiate the most favorable price for the seller.
Clerical - selling a business involves a mountain of paperwork. Some common forms needed may include a letter of intent, purchase agreement, and buyer’s due diligence. A business broker knows which documents are needed and why, submitting all of the necessary paperwork for the seller to ensure a smooth transaction.
Regulatory - unlike many forms of real estate transactions, a business sale involves the transfer of licenses and permits. A business broker helps both the buyer and seller understand if all regulatory requirements are met to help avoid any fines during the selling process.
4. Develop a Succession Plan
One of the most valuable assets to your company is its professionals. Buyers will be far more interested in inheriting an experienced team than they will be in jumping in blindfolded.
To make your business more attractive, have a clearly defined succession plan in place. Communicate with your employees about the imminent ownership change and let them know as soon as possible what their continuing status will be. Identify your top professionals and recruit them to stay on with the company even after you leave. Develop a leadership and management structure that will make the transition to the new owner as smooth as possible.
5. Have a Reasonable Timeline
Finally, it is important to give yourself time when selling your business. You cannot list your business today and expect to receive a fair price tomorrow. The COVID-19 pandemic highlighted the need for taking time during the selling process, as many owners forced into selling their business due to financial concerns took pennies on the dollar for what they could have gotten under normal circumstances.
In most cases, it will take at least three years before a business changes hands. And listing your business for sale does not mean that you are “all done.” Buyers will continue to assess your business while it is listed, so it is critical that you maintain airtight operations and demonstrate ongoing profitability while it is on the market.
5 Important Consideration When Preparing Your Business for Sale
Moving on from business can be a difficult process, both emotionally and in terms of work required. And while the selling a business checklist can seem never-ending, organizing the finances, receiving a professional valuation, working with a business broker, developing a succession plan, and having a reasonable timeline are 5 of the most effective steps you can take when preparing your business for sale.