Selling a business doesn’t have to be a complicated and drawn-out affair. Whether you have a small store or a large company, if you follow these six steps described below, you should be able to sell your business quickly and easily.
With the economy roaring and economic conditions stronger today than they have been in years, now is a great time for selling a business. But before you hang up a for-sale sign in the window, you’ll need to do some advanced planning first.
If you’re interested in selling a business, follow these six steps to streamline the process and maximize your selling price.
1. Determine your business’ actual value
To get a realistic estimate of what your business is really worth, consider getting a third-party valuation assessment. For a set fee usually less than $10,000, a certified business evaluator will analyze your business, along with the environment of your competitors. After reviewing a company’s sales, receivables, inventory, assets, and outstanding debt, most businesses are usually worth three to six times their annual cash flow.
Of course, there are many other variables such as overall financial health, industry trends, market demand, reputation, and location that can affect a business’ value. In the end, the selling price typically is determined by how risky the business is versus its growth potential.
2. Clean up your financial records
If someone is going to pay good money for a substantial investment like a business, they want as much transparency in the financial records as possible. To avoid red flags, a business owner should hire an accountant to go over the financial statements and business tax returns (going back at least three years) to make sure they’re accurate and account for all income and expenses.
Also, please avoid potential problems like having personal cars, boats, or other large assets on the company books. This could cause prospective buyers to hesitate.
3. Increase sales
Potential buyers want to see a business with a strong upside, such as increasing sales. If sales are flatlined or even declining, that’s not a good time for selling a business. And if a single customer accounts for more than 25 percent of sales revenue, a buyer could be weary because of the risk if that customer leaves. Try to diversify your customer base and increase sales with new or additional marketing promotions.
4. Consult a business broker
Your business may sell the best cupcakes in the world, but selling cupcakes is completely different than selling a business. It’s always a good idea to consider professional help for a business sale.
Business brokers will charge a commission of a small percentage of the sale price in return for performing the business valuation, listing the business in appropriate commercial forums, tapping into their large sales network to find a buyer, and using their experience in negotiating to get the best price for you. Brokers can also direct buyers toward sources of financing, which helps immensely to close a deal.
The hardest part of a selling a business is performing the due diligence. This is typically where the deal falls apart and the business broker provides the most value.
5. Pre-qualify your buyer
The large majority of business sales are paid for with third-party loans. One major reason deals fall through is because the prospective buyer isn’t able to secure financing. So if you get an offer for your business, don’t get too excited at first. Always pre-qualify your buyer first so you can be sure they’ll have the money available to buy your business.
You definitely don’t want to go through the entire process of closing a business sale only to find out at the finish line that the buyer doesn’t have enough money. As mentioned above in step four, business brokers can be very helpful at connecting buyers with sources of financing.
6. Line up the legal contracts
When selling a business, there are a lot of legal documents to consider. One that is required to close the sale of a business is the asset purchase agreement. This is a legal contract for the sale of the business’ assets, including both physical and intellectual property. You’ll certainly want a business attorney to draft this important document that contains non-compete agreements, employee contracts, listings of assets, and website domain name usage rights, among others.
Obviously, a lot goes into selling a business. But if you follow the six steps described above and hire experienced professionals when necessary, there’s no reason the entire process can’t be smooth sailing.
First Choice, the business brokers for Loyalty Brands, is available if you want more information about buying or selling a business. Contact us today!