The decision to sell your business is a consequential one and shouldn’t be taken lightly. You have sacrificed your time, finances and effort into establishing, operating and growing your organization. It may very well have defined who you are as a professional in your given industry.
If you have already made up your mind that you will be selling your business, you understandably want the absolute best professional input to guide you along the process. This is when consulting with an experienced, trusted business attorney can make all the difference between simply getting rid of your business and selling it at an optimal price point on terms you control. Remember, you only have one chance to get it right.
The following are some of the most common issues and questions that arise when business owners are contemplating the sale of their entity.
One of the most common initial questions sellers have is, “What is the value of my business?” Quite honestly, if I was selling my own business, that is one of the first metrics I would want to clarify. The good news is that it is not necessary to make a full-blown commitment to sell in order to determine what your business is worth.
However, let’s put this important topic off for a moment and cover some of the factors you need to consider prior to reaching the valuation process. Keep in mind that it doesn’t matter what you deem 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 valuation that matters is the one you receive from the marketplace—whatever the market is willing to pay for your company at the current moment is what will ultimately dictate what you recoup.
Why Are You Selling Your New York Small Business?
First and foremost, you should determine why you are motivated to sell your business. Owners typically sell their business for a multitude of personal and professional reasons, which include:
- Partnership disputes or tension
- Illness or death
- Unsustainable hours
- Loss of passion
Other owners will seek to sell their organization when it no longer returns an ideal profit margin—although doing so can make it challenging to source viable buyers. Who wants to buy a failing enterprise?
Gather All Of Your Documents
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
- Strong target customer base/following
- Substantial contracts 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 losses for the last three years
- Federal Income Tax returns for the last three years
- Inventory of fixtures/equipment
- Lease and/or rental agreements, both property and equipment
- Outstanding loan balances/payment schedules
- Franchise agreement, if any
- Current inventory
- External investors contact information, if any
- Documentation regarding the ownership interests of all parties in the business
Most small business owners will have to track some of these items down.
Create a Pitch Deck (Even an Informal One)
After you gather all the information listed above, take the time to ensure all data is up to date and complete. Then organize it in an organized, logical format just as if you were pitching it to a potential customer. Pay particular attention to the business’ financial statements. If you are mid-way through the current year, ensure that you have calculated last year’s figures and tax returns in addition to the year-to-date data. It is a worthwhile investment, if needed, to obtain the services of an outside financial professional to put the statements in order—presenting the entity in a positive light ‘on paper’ is half the battle when it comes to successfully selling your business.
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. Tax law will dictate the amount of the sales price you will actually be able to keep. 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, partnership or proprietorship? If it is incorporated, is it organized as a C-corporation or a sub-chapter S corporation? Additionally, there are more tax regulations that can influence seller financing. The main takeaway from all of this is that prior to attempting to settle on a price or even making the decision to sell your company, you should first analyze the tax implications of a sale of your business with an experienced business attorney and your accountant. The last thing you want is to be far into the sales transaction with a promising buyer and find out unexpectedly that the tax consequences of the sale will mean that you will net far less than originally contemplated.
Timing is Everything
As the old 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 a year or two ahead of your planned departure from the industry. This time window will ensure you have adequate time to improve your financial status, restructure/organize your business and develop your customer base to increase profitability. The additional sweat equity 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.
Returning to the valuation topic, the key is to find that “sweet spot” that is neither too pricey or too below-market in order to attract the right type of buyer clientele. The best approach is to find a local business appraiser with a proven track record of results in the surrounding market who will be able to accurately estimate the present worth of your business. They will draft a detailed explanation and break-down of their valuation process. Providing these documents will provide a significant credibility to the asking price that you settle on. Ensure that the appraiser has the appropriate credentials as well. The Accredited in Business Valuation (ABV) is a professional designation awarded to financial professionals and overseen by the American Institute of Certified Public Accountants (AICPA) and requires candidates to complete an application process, pass an exam, meet minimum Business Experience and Education requirements, and pay a credential fee annually.
Sourcing Prospective Buyers
The timeline of a business sale can vary widely based on the size of the organization and other situationally dependent factors—taking anywhere from six months to over two years according to SCORE, a nonprofit association for entrepreneurs and partners of the U.S. Small Business Administration. Locating the ideal buyer can be easier said than done. Here are some guidelines to keep in mind while you are reviewing potential buyers:
- Require all potential buyers to consent to a nondisclosure and/or confidentiality agreement to safeguard your business data. This is key when your business’s profits are tied to valuable IP information.
- Select two or three viable buyers in case the initial candidate falls through
- Maintain consistent contact with all interested buyers
- Determine if the potential buyers pre-qualify for funding prior to releasing information pertaining to your business
- If you are planning on financing the sale yourself, hammer out the details with a business attorney to arrange a contract with the buyer
- Build in some flexibility to accommodate for negotiations, but remain firm on a sales price that is justifiable and factors in the entity’s future revenue potential
- Make sure all agreements are memorialized in writing
Spend some time—at the very least a couple of months—prior to spending the profits generated from the sale of your business. Establish a solid plan that clearly sets out your short- and long-term financial objectives and plan accordingly for any anticipated tax obligations associated with the sales proceeds. Consulting with a financial professional in order to make informed decisions regarding potential investments is always a good idea for optimizing your future stability.
Let Us Help You Make Selling Your New York Small Business Part Of Your Success Story
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Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM, PLLC which dedicates its practice to serving entrepreneurs, startups 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.