The decision to sell your business is a monumental decision—one that shouldn’t be taken lightly. You have sacrificed time, finances and considerable effort into establishing, operating and growing your organization. It may even have come to define who you are as a professional or leader in your given industry. If you merely beginning to consider selling or have already made up your mind that you will be selling your business, you will understandably want professional input to guide you along the process. This is where working with an experienced and qualified business attorney can make all the difference between merely “getting rid” of your business and monetizing your exit at a price point and on terms you influence significantly to your advantage.
The following are some of the most common questions that arise when business owners contemplate the sale of their entity.
“What is the value of my business?”
Quite honestly, if I was selling my own business, that is also one of the first metrics I would want to clarify. The good news is you don’t have to obligate yourself to determine what your business is worth. The bad news is that it doesn’t matter what you think your business is worth or the specific dollar amount you want for it. It also doesn’t make any difference what your accountant, family or banker estimates your business is worth. The only forum that matters is the marketplace—whatever the market is willing to pay for your business at the present moment is what will ultimately dictate your price point.
“What influences the value of my business?”
There are a number of factors that can impact valuation. Let’s look at each in turn.
1 - Why Are You Selling?
Why are you motivated to sell your business? The specific reasons for a sale event are a diverse as the owners who sell their businesses. However, they often fall into one of these general categories:
- Retirement – it’s time to realize the value of a lifetime’s work
- Partnership disputes – peace of mind is invaluable
- Illness or death – you or a partner are unable to continue
- Unsustainable investment – you’re losing time, money or both
- Loss of passion – it was great while it lasted, but now you are done
As you can surmise, some of these reasons lend to higher valuation bases than others. For instance, buyers are much more attracted to a business that took care of a family’s needs for a generation and how the owner wants to exit, versus someone who has been trying (and not quite succeeding) to make a go of a business.
2 - Profitability is Key
In order to enhance your business’s profile from a buyer’s perspective, it helps to showcase the following characteristics:
- Positive trends in cashflow
- Sustainable income, preferably in guaranteed contracts in place
- Strong target customer base and following
- Substantial vendor/supplier/partners spanning several years
If you are serious about selling your business, the first thing you have to do is assemble the following documentation:
- Profits and loss statements (P&L) for at least the last three years
- Federal Income Tax returns
- Inventory of equipment, fixtures
- Lease and/or rental agreements
- Contracts for goods, suppliers, equipment
- Outstanding indebtedness, including balances/payment schedules
- Franchise agreement (if applicable)
- Current inventory
- Current client contracts
- Employee information, including identifying key personnel
- Organizational, formational and ownership documents of the business
- Information on any shareholders or investors
Most small business owners will have to track some of these items down. After you gather all the information listed above, take the time to ensure all data is up-to-date, complete and accurate. It should be organized it in a logical format just as if you were pitching it to a potential customer.
Note that the real issue isn’t so much how much you can sell your business for, but how much of that amount you will ultimately be able to retain. With any monetization event, Federal and State tax authorities are expecting their share. The manner in which your business is structured will play a significant role in determining the applicable tax status during the sales process. For instance: Is your business a corporation, limited liability company or a partnership? If a corporation, did you make a sub-chapter S election? Ultimately, you will want to carefully allocate the purchase price to different assets to maximize your use of capital gains tax rather than ordinary income tax rates.
3 – Timing is Everything
As the adage goes: “Fail to prepare, then prepare to fail.” The same holds true in this context. Ideally, you should start preparing for the sale of your business at least a year or two ahead of your planned departure from the entity. This will ensure you have adequate time to improve your financial status, restructure or reorganize your business, and develop your customer base to increase profitability. This hard work that you put in prior to the eventual sale of your business will smooth the transition process for the future buyer and ensure that the business continues to run optimally during the process.
4 – Work with an Experienced Professional
With respect to finding the “correct” valuation that the market will bear, the key is working with an experienced professional, whether it be a business attorney who has experience in sales, a business broker, or a CPA with an ABV (accredited in business valuation) designation.
“How do I find a buyer for my business?”
Locating the ideal buyer can be easier said than done. SCORE, a nonprofit association for entrepreneurs and partners of the US Small Business Administrative, says that it takes between six and twenty-four months for a business to find the right buyer.
Here are a few practical tips when you’re sourcing the purchaser of your business:
- Be sure to use NDAs to protect your valuable confidential information throughout the process
- Don’t fixate on one particular buyer too early in the process
- If a buyer wants you to help finance the sale, be sure to conduct your proper due diligence on the creditworthiness of the buyer
- Ensure all agreements are in writing
- Work with an experienced business attorney to ensure that your liability for the business is properly terminated upon sale
“I’ve found a buyer, now what?”
Call us. We want you to achieve the best results from this sale. Remember, you only get one shot to sell your business right.
“What else should I know?”
See our articles on Due Diligence, Asset v Stock Sales, Five Tips on Selling Your Business, and Succession Planning.
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM, PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.