The Essential Steps to Selling Your Business - BusinessTown

The Essential Steps to Selling Your Business

The first step to selling your business is to realistically assess if the business is likely or even possibly saleable. If you aren’t sure, try having a candid discussion with someone in your industry, or consult a business broker.

But as a rule of thumb, if you’ve been in business for at least a year or more, and have shown some profit, or at least have very clear path to profit soon, your business should be saleable to someone.

Second, you need to decide if you want to sell all or just part of the business. Large corporations are constantly selling part of their business and buying other businesses, in an attempt to acquire businesses that fit together and have synergy, that are growing quickly, or for many other reasons.

Third, you need to decide upon the minimum price for which you’d sell the business after seeking out the best bids possible.

Fourth, you need to decide if you would consider offers other than those that are strictly cash. For example, would you allow the seller to pay you over time? And if so, how would you structure it? If you were to decide to allow the seller to pay over time, I would be inclined to recommend that you actually have the owner buy the entire business, that is, all the equity in the business, at one time. Then I would have them sign a promissory note, or a written promise to you for the balance. This would give you better protection if the buyer can’t or won’t make all of the loan payments.

Fifth, you and the buyer should think about the tax implications of the sale. For example, buyers will often demand that you sell them just the assets of the business, not the business itself. In other words, they are buying the assets but not assuming the liabilities. Buyers tend to do this because it helps shield them from potential liabilities that may stem from the time you operated the business. They may also receive tax benefits because they then can write down the value of the assets or, in other words, take a non-cash charge on their tax returns.

Finally, you need to decide what your ideal role would be after you sell the business. For example, you might decide that your ideal situation would be to sell your business and then to depart on your new boat and sail around the world the next day. Or you may decide you would be willing to stay on and help manage or consult on the business full time for six months and or part time for one year after you sell it.

As a seller, however, you should strive to sell the whole business: assets and liabilities and not just liabilities. This decreases, but by no means eliminates, your risk of liabilities from the time you ran the business. However the buyer may have you sign a statement that certifies that you assume all liabilities from when you were running the business, or that you have disclosed all liabilities, which means you could potentially get stuck with them anyway.

Furthermore, if your business is a traditional C Corporation in the U.S., you would have to pay corporate taxes on the entire asset sale. You would also have to pay personal income taxes once you distribute the proceeds from the assets to yourself. While this may be hard to believe, it is a financial reality you should be keep in mind,

Also, in some states in the U.S., such as Massachusetts, where I live and where most people and especially most politicians hate businesses and business people with a passion, this double taxation even applies to S Corporations.

Of course these rules and laws can change from time to time and place to place. There can be many offsetting intricacies, especially if you have a complex business. Don’t hesitate to consult your accounting firm and carefully learn the (gory) details.

While this situation may sound messy, I can assure you that it probably was not as messy as mine. I had a business that I started as a sole proprietorship, converted to an S Corp, then converted to a C Corp, later converted back to an S Corp, and then converted once again to a C Corp inside a Massachusett’s business trust (an obscure entity which tax hungry politicians ended). The real problem came when the highest bidder insisted on an asset sale So I had to have extensive historic valuations performed on the business to be able to verify the assets.

You must next decide if are going to sell the business on your own, or with the help of a business broker or investment bank. If you are not highly experienced in selling a business I would suggest you use an intermediary. Choose a good investment bank if your business is large enough and you can find one willing to take you on, otherwise select a business broker for a smaller deal.

Then, working with your team, prepare your financials for presentation to potential buyers. You want to exclude expenses that a new buyer might not incur (such as your private airplane or country club dues) but add in items that they might incur but you did not (such as when you skipped giving yourself a salary for three months because you ran out of cash). You also want to prepare a projection for sales for the next few years, showing your key assumptions, while cautioning that there is no guarantee.

Next, prepare what is called “the book.” This is basically the offering of the business and the story about the business: why it is great, why it is different, the products and services offered, and why it would make a great purchase.

Afterwards, decide on what forms potential buyers need to sign, such as a non-disclosure agreements, and set a deadline for offers.

When it is time to announce the sale, create a list of possible buyers such as industry competitors, or advertise if you are trying to sell it to individuals. From this list, create another list of qualified, interested buyers, send them a book, answer their questions, and, if their interest continues, give a presentation.

Weigh the offers that you receive and make a decision on the best one for your business.

From that point, the buyer does their due diligence. Frequently the buyer finds something in the due diligence that moves them to re-adjust their offer and you must decide to agree to the new offer, to renegotiate, or to go back to other buyers.

Finally the deal closes. But quite often, you are not done. Sometimes the buyer comes back and files a lawsuit saying you misrepresented something, or the projections were an intentional fabrication, or you didn’t disclose something material. I am happy to say this has never happened to me. I firmly believe I sold good businesses that represented good value for fair prices and that I sold them to good, honorable, and savvy business people. Just as importantly, I sold them to “good” buyers.

There is a several ways to reduce your chances of getting sued after selling a business. First, make sure what you’re offering and presenting is not exaggerated. Have your attorneys make sure you have all the proper disclosures.

But an important lesson comes from a friend of mine, Steve Karol, founder of the private equity firm the Watermill Group: You always leave some money on the table. In other words, you don’t try to wring every single last penny out of the deal.

Remember: you can choose the buyer. I would try to find out if the acquiring firm has a record of suing firms from which they have bought businesses. I would try to determine if the buyer has the potential to run the businesses successfully. Unsuccessful or highly disappointing deals tend to end up in lawsuits.

Selling a business successfully can be a long road, but it is a highly worthwhile one toward maximizing the value of your business and making for a good, clean sale.

More Details on the Business Sale Process

Now that I’ve finished outlining the basic steps in the business sale process, I’ll go into a little more depth on some key points.

Business brokers

A business broker acts as an agent for an owner looking to sell a business. Some real estate agents broker businesses but most business brokers are, themselves, small local businesses representing area small businesses or larger businesses in a particular industry. They can be found through telephone listings or advertisements in local newspapers or trade magazines. They typically charge the owner 10 percent of the final sales price, which is payable at closing.

There are several advantages to using a business broker. The broker will allow you to maintain confidentiality if you don’t want your intent to sell to become public knowledge. It saves you the time of talking to potential buyers, thus allowing you to focus on running your business. Some prospects may be more comfortable, at least initially, talking to an intermediary about a business rather than talking directly to the owner.

A broker who specializes in a particular industry may have excellent contacts at larger corporations that might be interested in buying out your company at a higher price than an individual buyer might.

Nonetheless, a broker’s fee is substantial and you will want to weigh the expense before you decide to list your business through a broker.

Partial sale

You may decide to sell part of the business, rather than all of it. If one segment of your operation is growing much more quickly than another, you may want to consider placing the less successful portion on the market. If you are able to sell it, you will have more money and time to invest in the remainder of your company.

In order to make a partial sale, you will have to break out the financial information and prepare a two-year profit and loss statement for the separate business segment you are selling. This may be tricky, and you might want to consider having an independent accountant perform the work or at least check over your work.

Financial statements

The basic financial information needed to sell most small businesses are profit and loss statements and balance sheets from the last five years of operation. For medium or larger businesses, cash flow statements will also be expected. If you are three or four months into a new fiscal year, you should also provide an interim financial statement.

One of the first things a prospective buyer may want to know is who prepared your financial statements. Even if you have prepared your own financial statements in the past, you should consider having an outside firm prepare or review them for the sale. This will increase the value of the business in the eyes of potential buyers and increase the likelihood of making the sale.

If you decide against using an outside accounting firm to prepare your financial statements, offer to show copies of your corporate or, in the case of a sole proprietorship or partnership, personal tax returns to serious potential buyers. This will help to substantiate your businesses profitability.

Management agreements

Often the prospective buyer will express an interest in having the current owner continue to run the business after the sale takes place. If you are interested in doing this, be sure to get any such agreement in writing. Working relationships between new owners and ex-owners are often highly subject to friction.

Will anyone buy my business?

The only way to find out for sure is to place your firm on the market. Generally, a small business that is relatively new, unprofitable, or has a sharply declining sales history will be difficult to sell. Reviewing the simple valuation guidelines will give you some indication of how marketable your business may be.

The higher the suggested multiple of earnings for your business, the more chances you have of finding a buyer.

Valuation

The selling prices of similar businesses in your area will provide an indication of what you can expect to receive for your business. Do note that we are talking selling price, not asking price. Typically, small businesses sell for significantly less than the asking price. Sophisticated buyers might evaluate your business on the basis of projected cash flow for the next few years. They will then discount the value of that cash flow to reflect the amount of risk inherent in the business and the importance of their personal efforts in maintaining the success of the business. They will also consider what their money could be earning in a “risk free” investment such as a U.S. government Treasury Bill.

Selling to larger corporations

Sometimes it is possible to sell your business to a larger corporation for more than it is worth to an individual buyer.

A larger corporation that is active in the same business area as you may be able to improve on your profit margins by folding your business into one of their business units. It might also be able to eliminate or reduce back-office expenses, such as accounting or warehousing, and sales expenses, such as paying independent commission representatives, by using their own staff and facilities.

Also, a larger corporation that is trying to grow quickly in a new strategic area may be willing to pay a fat premium to quickly acquire market share.

Any corporation with which you are currently engaged in any type of cooperative effort should be targeted as a potential buyer.

Attorneys

There are two areas where it is strongly suggested that you consult with an attorney when selling a business. The first instance is when you prepare a circular or prospectus summarizing your business for potential buyers, and the second is when you prepare a purchase and sales agreement.

While you may have operated your business successfully year after year, a new buyer without your particular skills, expertise, or personality may easily run into problems. If the business turns out to be less successful or more difficult to run than the buyer anticipated, he or she may assume that the business was fraudulently represented.

One way to reduce the risk of litigation in this transaction is to have an attorney review your circular or prospectus. The attorney will undoubtedly advise you to avoid projecting future sales or profits, or at least be extremely careful when doing so.

Even if you are selling a very small business, you should have your attorney review, if not actually prepare, the purchase and sales agreement. Buying and selling businesses is often much more complex than, for example, making real estate transactions. There are more variables and much less standardization in the wording of business sales agreements.

Employees

Make sure that employees hear about a potential sale of the business from you and not a third party – rumors breed nervousness. Some of your staff may decide to seek employment elsewhere and leave immediately.

If you decide to advertise the sale of your business openly, tell your employees before the advertisements run. Explain that the sale could take a long time to happen and, unless you plan to close down if no sale occurs, may not happen at all. If you expect to find a buyer who will keep all or most of your employees on the payroll, tell this to your staff. Remain truthful, but emphasize the positive.

If you decide to advertise the business confidentially, make a concerted effort to avoid any leaks to employees. Consider using a business broker and have any interested buyers sign a nondisclosure agreement. Potential buyers should also visit your operation during off hours.

You may decide that one or more of your employees is the best potential buyer for your business. Employees know the business better than outsiders and may be able to persuade investors or lending institutions to help them finance a leveraged buyout

Qualifying buyers

During the course of selling a business you will get a lot of tire kickers. They won’t really be interested in buying and can waste a lot of your time. You need to be able to quickly judge the seriousness of a prospect so that the energy you put into discussing the business isn’t entirely fruitless. After all, you still need to concentrate on running your business.

Sometimes the otherwise best prospect for buying your business is not able to obtain third party financing. Hence, it is very common for businesses to be sold with seller financing.

If you do decide to provide financing, have the buyer sign a loan agreement with you and be sure to get an attorney to write up the documentation. Don’t assume that just because you ran the business profitably the new owner will do so as well. Try to get as much solid collateral as you can in order to protect your loan.

If your business includes real estate, motor vehicles, machinery, or other hard assets, you may want to consider selling them separately or even leasing them to the new owner. This could increase the pool of qualified prospects, increase your chances of completing a sale, increase your downside protection, and decrease the need for seller financing.


About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.

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