Putting a small business up for sale isn’t just about attracting potential buyers. Astute sellers come armed with an understanding of their company’s position in the marketplace, an appropriate price tag, and insights into the suitability of prospective buyers, well before discussions start. Even if you’re going through something like a divorce or about to get a divorce, getting a quote or shopping your business to sell can be very important.
The journey of selling is methodical—ranging from refining cluttered financial records, rejuvenating outdated shops and systems, to enhancing marketing strategies to achieve a premium selling price. The right broker can help you a ton, but selling it yourself can also be rewarding because you won’t pay a broker fee.
As the next decade unfolds, numerous solo businesses will change ownership, given the retirement trend among baby boomers. If you want to sell FAST, we’d recommend finding a broker.
Considering selling? Here’s a guide with seven key strategies to keep you proactive:
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- Accurately Gauge Your Business’s Worth
Understanding the true value of your business is the cornerstone of any successful sale. Before embarking on the sale journey, it’s crucial to have a comprehensive and realistic estimate of what your business is worth. A third-party evaluation, carried out by experts who specialize in business valuation, provides an impartial and in-depth analysis of your company’s financial health, assets, debts, and overall market position.
An effective valuation considers the full scope of the business—from sales and receivables to inventories, other assets, outstanding debts, and potential liens. The primary aim is to identify both imminent and latent threats as well as the opportunities that can affect the company’s value.
Now, how exactly is this value derived? Small businesses generally have a valuation that ranges between three to six times their annual cash inflow. However, this isn’t a fixed formula. Factors like the overall financial health of the company, current industry trends, market demand, geographical location, and even the potential for future growth play a role in determining this number. For instance, a business located in a bustling urban center might command a higher valuation than a similar business in a more remote location.
Moreover, the future growth potential of the business is crucial. The valuation process doesn’t just consider the current status but also looks into how the business is poised for growth. Is it scalable? Are there untapped markets or demographics? How does it fare against competitors? These are some of the critical questions a valuation addresses.
In essence, determining your business’s worth is not just about numbers. It’s about understanding its position in the current market, its potential for the future, and the tangible and intangible assets that contribute to its unique value.
- Enhance the Transparency of Your Financial Records
In the ever-evolving business marketplace, clarity and transparency in financial documentation are paramount for potential buyers. Steve Rosen of Sunbelt Business Brokers emphasizes that today’s discerning buyers are diving deeper into due diligence. They meticulously inspect various facets of a business—from its financial statements to assets like real estate and equipment—before making an investment.
To ensure that your business appeals to these conscientious buyers, it’s crucial to streamline your financial records. Collaborate with an experienced accountant to organize and present clear financial statements, ensuring they span at least three years. This not only gives potential buyers a comprehensive view of the business’s financial health but also instills confidence in its legitimacy and profitability.
Avoid common pitfalls, such as listing personal assets like family cars or boats under business expenses, which can raise unnecessary concerns. Further, be prepared for buyers to request the most recent financial information, which means year-to-date results should be readily available.
In today’s market, stakeholders extend beyond just buyers. Commercial landlords, for example, have become more hands-on post-recession. They are actively vetting potential buyers’ creditworthiness, reflecting the increasing demand for financial transparency at every transaction level. As a seller, it’s beneficial to anticipate these needs and prepare your business accordingly.
- Strategically Plan Your Exit Ahead of Time
Proactive planning can often make the difference between a rushed, unfavorable sale and a well-executed, profitable exit. Whether it’s the onset of a health issue, the entrance of a formidable competitor, or the lack of interest in the business from the next generation, unforeseen factors can propel owners to sell hastily.
To navigate around such abrupt decisions, it’s prudent to devise an exit strategy well in advance. An early plan allows for a smoother transition, ensuring the business remains attractive to potential buyers. One of the often-overlooked options is to groom a trusted employee to take the reins. Such an individual, already familiar with the business operations, clientele, and potential challenges, can ensure continuity.
However, if you’re considering selling to someone outside the industry, Knox advises allowing ample transition time. This ensures the new owner acclimatizes to the business dynamics, ensuring stability post-sale. Ultimately, having a clear, pre-established exit roadmap can ensure the business thrives beyond your tenure, guaranteeing a legacy that persists.
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- Enhance and Diversify Your Revenue Streams
A thriving business, especially one displaying consistent growth, is a magnet for potential buyers.
Diversification is key. Prospective buyers may feel uneasy if a significant portion of your revenue hinges on a single client. Such dependency poses a risk: if that client were to leave, it could devastate the business. As a remedy, consider broadening your customer base, seeking new market opportunities, or even branching into complementary product or service areas.
In parallel, revisit your operational facets. Clear out stagnant inventory, modernize outdated operating systems, and consider aesthetic upgrades if you’re in a consumer-facing sector. For instance, a retail space might benefit from modern fixtures or a revamped store layout. Similarly, restaurants could refine their menu or enhance the dining ambiance.
A proactive approach to growth not only enhances your business’s value but makes it more appealing to discerning buyers.
- Engage a Knowledgeable Business Mediator
Running a successful business doesn’t necessarily equate to expertise in selling one. Often, business owners are exceptional at their trade but might not have the necessary skills to negotiate a profitable sale. This is where a business broker’s expertise becomes invaluable.
Business brokers are akin to real estate agents for companies. For entities generating under $5 million annually, these brokers typically charge a commission ranging between 5 to 10 percent of the final sale price. Their role is multifaceted. They can conduct a business appraisal, prepare a detailed prospectus to attract buyers, and leverage their expansive networks to find the right match.
In summary, consider securing a broker when you’re ready to sell. Their familiarity with the selling process, combined with a vast network, can streamline the transaction and help secure a favorable deal that reflects the true value of your hard work.
- Vet Your Potential Buyers Thoroughly
One of the pivotal stages in selling a business is identifying a genuine and capable buyer. While an attractive offer can certainly catch your attention, it’s essential to ensure the prospective buyer has the financial capacity and seriousness to follow through.
Most small business sales involve some sort of third-party financing, often supported by institutions like the U.S. Small Business Administration. Therefore, a fundamental mistake many sellers make is entering negotiations without ascertaining if the buyer has the necessary financial backing.
Banks and lending institutions often expect sellers to finance a part of the deal, reflecting the seller’s confidence in the business’s continued success post-sale.
- Organize All Business Contracts
When selling a business, addressing the legal intricacies is paramount. Essential to the sale process is the asset purchase agreement, a detailed contract outlining the sale of the business’s tangible and intangible assets. This comprehensive document encompasses various exhibits like noncompete clauses, lists of assets, employee contracts, and protocols for website domain names. It doesn’t include the sale of any stock. Gathering all the required information and presenting it meticulously is crucial to ensure a smooth sale.
Furthermore, many sales agreements specify that the outgoing owner stays on in a consulting or advisory role for a designated period to guarantee a seamless handover. This transition phase can be invaluable to the new management as it benefits from the prior owner’s expertise, insights, and relationships, thereby setting the stage for continued business success. Yet, it’s essential to strike a balance, ensuring this overlap is beneficial but not prolonged, facilitating a quick yet efficient handover.
