SELLING A BUSINESS
No doubt, you've invested a lot of yourself and your resources in your business. Now you've decided to move on. Selling your business may be the doorway to your future. Your first step is to talk with advisors about coordinating your financial and legal course of action.
Fact is, your company is only worth what someone is willing to pay for it. Several factors can influence a buyer's decision: return on investment (five to six years is considered reasonable), age of your business, national and local economic conditions and the difficulty of managing your business.
To make the transaction happen in a reasonable time and on the best terms, you need to:
- Determine what your business is worth
- Find the right buyer
- Establish financing
Determine what your business is worth
This can be the most complicated part of the selling process and you'll be wise to ask an expert.
You'll be required to gather a number of documents. Audited statements from your accountant will help attest for your company's stability. Other documents include:
- Balance sheets and income tax returns for the past three to five years.
- Income statements.
- Record of accounts receivable and accounts payable.
- Copies of any mortgages or loan notes.
- Lease agreements.
- Current contracts with employees, customers and suppliers.
- Corporate books if your business is incorporated, or partnership agreement if your business is structured as a partnership.
- Patent, trademark or copyright certificates.
There are a couple methods to help you determine the value of your business:
- The book value method essentially subtracts your liabilities from your assets. Fixed or tangible assets include everything from machinery and equipment to inventory, guaranteed receivables and prepaid expenses like taxes and deposits. Your liabilities will include those items that reduce your selling price, such as salaries, bills and periodic expenses, bank notes and loans, and federal, state and local taxes. The primary disadvantage to this method is that it does not consider the earning potential of your business.
- The capitalized earnings method takes into account your business's expected income or profits. However, since most businesses deduct everything legally possible to reduce taxes, the profit margin may seem smaller than it actually is. To counter this problem, prepare an itemized profit-loss statement that shows the surplus cash your business produces, instead of just the final profit statement for taxes.
Again, a qualified, independent professional business appraiser should always be considered.
Find the right buyer
If you're selling your business outright, you have several options for finding the right buyer. Traditional avenues include classified ads in newspapers, trade publications and business journals or simply spreading the word through your local chamber of commerce or economic development center.
You also have other options for finding the right buyer. Consider the following sources:
A business broker's job is to manage a portfolio of potential buyers and help negotiate terms of the sale between buyer and seller. Business brokers, like real estate agents, are paid on commission. So the higher the sale price, the better they are paid. As the seller, this generally works to your advantage — but beware of the broker looking for a quick sale who might undervalue your business.
Given your market share and the value of your customer base, one or more of your competitors might be interested in buying your business. You'd be wise to work with your advisors in having a third-party administrator (such as a lawyer, accountant or broker) handle the deal to ensure your business maintains its proper value.
Employees or partners
Your best prospective buyers might be working with you. Chances are a long-term employee or partner will understand the value of the business and have the skills to continue its success. An added bonus is your customers will be less likely to be affected by the change.
If your business wholesales to customers who then resell your product, your business could mean a new opportunity for them. Be careful in approaching your customers as buyers — if competition among them is fierce, you could jeopardize your business more than encourage its continued success. A third-party mediator is a good idea for this type of negotiation.
Purchasing your business might present a new opportunity for a vendor, one with potentially low risk — especially if your business is stable.
Your personal financial needs and lifestyle may influence the way you choose to sell your business. One of the biggest decisions for you is how involved you want to be and if you are willing to participate in the financing. If you want completely out, the buyer will have to obtain independent financing. Regardless, you'll want to examine your options.
This is by far the simplest route. Once you and your buyer agree on the price, you're paid and the deal is done. You have no financial obligation here.
The buyer pays a portion of the selling price at closing and you agree to provide financing for the balance. This may be driven by the amount of goodwill factored into the total value of the business. Since it is hard to set a price on goodwill, sellers often finance that segment of the final price.
You could offer your buyer the option to lease the business with the possibility to buy it over time. This allows a buyer who may not have sufficient cash or financing, to participate in the business and earn money to buy it. You remain the owner until the final payment is made.