Optimizing your preparation and valuation when it’s time to sell.
Key Takeaways:
● Detailed preparation helps reduce the stress and uncertainty associated with the sale of a business.
● Organized financial data makes the due diligence phase smoother while leaving a positive impression with buyers.
● A business valuation can be completed in many different ways.
● The right buyer demonstrates a strong combination of experience, capital, and motivation that bodes well for the future of your company.
With more than 12 million businesses expected to be sold in the next 10 to 15 years, the only constant in the business world is change. Market forces and personal factors can often pull business owners in different directions, making it difficult for them to recognize their window of opportunity. Like any important crossroads, deciding when and how to sell a business is often based on a combination of logic and intuition.
In this blog post, we break down the business selling process and provide tips and step-by-step guidance to help you find the right buyer and get the highest value for your business.
Overview of the business selling process
Selling a business that has consumed years of your time and energy can be a stressful and emotional event, even when you decide to retire or channel your energy into exciting new ventures. Preparing for the sale well in advance is one of the best ways to alleviate this stress while safeguarding the long-term prospects of your business and employees.
The basic steps of the business selling process vary depending on the type, size, and financial structure of the company, but completing the following activities successfully can lead to a smooth transition:
● Determine the value of your business. An appraiser, business accountant, or financial advisor can help you calculate the fair market value using the valuation method most appropriate for your business.
● Organize your financials. When a prospective buyer conducts due diligence, they will place an emphasis on the cleanliness and completeness of your financial data and records.
● Prepare your exit strategy. An experienced accountant, attorney, or broker can help you develop an exit strategy that maximizes your profit and signals to buyers that you are committed to the business vision and goals.
● Pre-qualify buyers. You don’t want to waste time negotiating with buyers who are not capable of completing the process. Experience, capital, and motivation are three essential attributes to look for when evaluating prospective buyers.
● Close the deal. Completing the signing process and post-closing obligations can take days or weeks. You want to avoid any last minute hiccups or surprises while establishing positive and open communication channels.
After you have successfully completed the business sale, the next item on your to-do list could be a well-deserved vacation. However, depending on the buyer and terms of sale, you might be involved with the business in some capacity for months or years to come.
Preparing your business for sale
One of the best ways to prepare your business for sale is by reviewing it from the buyer’s perspective. Like any prudent shopper, each prospective buyer develops their own checklist for buying a business that includes must-haves and additional information to be sought out and evaluated as they research new opportunities.
Once a non-disclosure agreement (NDA) is in place, financial data is often the focal point for most buyers, so plan to have at least three years of audited financial statements, accounts payable and receivable data, general ledger data, tax returns, and gross/net profit margin analysis reports readily available. Buyers will also want to learn more about your accounting methods, operating procedures, and intellectual property assets.
The business structure is an additional area of interest for many buyers, including formation and registration documents, organizational charts, board member biographies (if applicable), and any other documents that provide insight into the culture and operational health of the business.
Additional facets that are likely to be evaluated during the due diligence process include:
● Workforce records and payroll data including compensation and benefits packages
● Physical asset inventories with details on real estate, buildings, equipment, and vehicles
● Health and safety assessments that demonstrate commitments to environmental sustainability and workplace safety
Any business owner preparing to sell their company should also work on increasing their valuation. While it may seem obvious, driving higher sales while cutting costs requires a strategic approach to market expansion that does not entail a disproportionate investment in marketing or technology.
Tips for valuing your business accurately
An accurate valuation is one of the most important elements of a successful business sale. Business owners also need a precise valuation any time they secure a loan, court investors, project future growth, or offer shares of stock. Since the valuation process is so fundamental to the business sale, the various approaches deserve a closer look:
● Asset-based valuation is among the simplest methods, with the value calculated based on the sum of all assets (e.g., inventory, real estate, and equipment), minus any liabilities (e.g., debt and unpaid expenses).
● The cash flow approach uses the current and projected earnings of the business to determine the value. While this method can sometimes produce a higher value, it relies on predictions that are likely to deviate (in either direction) from reality.
● The market value approach is similar to methods used in the real estate industry, with the selling price of comparable businesses in the same geographic area used to inform the valuation process.
The financial condition of the business, future earning potential, and assets will determine which valuation method provides the best option for the seller, and it can be advantageous to use multiple valuation methods to compare the results. You should also consider industry norms for valuation so potential buyers can perform an apples-to-apples comparison with other similar companies. Hiring a seasoned business appraiser to provide an unbiased assessment can be a worthwhile investment.
Advice on finding the right buyer and negotiating terms
After you have collected and organized your records and obtained an accurate valuation, you can approach the selling process proactively by seeking out buyers rather than simply waiting for them to find you. This requires research and legwork to find contacts and network within your industry. Many business owners choose to let brokers or investment firms locate and pre-screen potential buyers to save themselves time.
Before you contact any buyers personally, you should streamline your sales pitch and develop a list of questions to help you determine whether you are aligned on key issues. For example, if it is important to you to keep manufacturing in the original facility to boost the local economy, you can quickly eliminate buyers who prefer an overseas outsourcing strategy.
The negotiation process officially begins the moment you send information about your company to prospective buyers, so it is important to have confidentiality and non-disclosure agreements in place from the outset. Interested buyers may want to draft a letter of intent (LOI) to formalize their interest while you negotiate the sales price, due diligence parameters, and other contingencies as you move closer to closing the deal.
How to sell a business: FAQs
What is the most effective business valuation method?
Each business or circumstance should be evaluated to determine the optimal valuation approach. The discounted cash flow method, which is based on the money (cash flow) a business is expected to generate in the future, has been dubbed the gold standard of valuation.
What is a sunk asset in the business valuation process?
A sunk cost refers to money spent by the business that cannot be recovered under any circumstances. For physical property like vehicles and equipment, an asset is considered “sunk” when it reaches the end of its useful life or becomes obsolete.
What is the difference between a strategic buyer and an opportunistic buyer?
A strategic buyer focuses on how well your business is likely to fit with their established company, while an opportunistic buyer may be looking to enter a completely new market or geographic area. Some opportunistic buyers are looking to purchase their very first company.
Is a letter of intent (LOI) to purchase a business legally binding?
A letter of intent typically contains a combination of binding and non-binding terms. For example, confidentiality and exclusivity are legally binding, but the purchase price and structure of the deal can be non-binding and subject to change.
Do I need to hire a broker to sell my business?
Hiring a broker may be the simplest way to sell a company. However, many small business owners rely on their own network and sales skills instead. They forego using a broker to avoid paying commissions (typically 1-5%) and losing some control over the sale process. Others take a hybrid approach of working with an experienced business attorney and accountant while taking a DIY approach to marketing and negotiating the sale.