Selling your business involves more than simply cleaning up your offices and making sure you have a website. If you put some strategy into the process and use these five common sense rules you will go into the process of selling your business with eyes wide open and hopefully will have a much more pleasant experience.
Know the value of your business
Before selling your business you should have a fair and realistic understanding of the value of your enterprise. Hiring an independent party to perform a market valuation is the best way to do this. The market valuation outlines the strengths and weaknesses of your business and provides you with a list of values of the most valuable tangible and intangible assets of the business. There are many different types of business valuations. For preparing to sell a business one that is rooted in a practical inventory of strengths and weaknesses is best. For a single location business in a mainstream industry with annual revenues below $5 million, you should expect to pay between $5,000 and $7,500. A good valuation of your business should take a efficient professional about 50 and 75 hours to complete. Often you should expect the valuation professional to spend several hours or more in your business.
Beware of free valuation offers by the business broker who wants to sell your business. Their motive is often to get a quick sale which may mean being paid less than the real value of your business. When you keep the valuation and business selling process separate you will have a better outcome.
Clean up your business’ books
Most businesses need to do some cleaning up of their books before they begin selling their business. Make sure your accounting records are pristine. Nothing will cause a business sale to crash more than having a buyer examine your books and find errors or misposted items. If you don’t already have a CPA prepare annual compilations start for the last year end. High performing businesses typically plan 5 years before they want to sell so they can provide five years of solid financials. Often it may make sense to have have your CPA prepare reviewed financial statements rather than compilations. Consult with your CPA or financial advisor. Though reviewed and audited financial statements are more expensive they provide the buyer a higher degree of confidence than compiled financial statements.
Go through your corporate records and make sure all of them are up to date. A buyer needs to be able to clearly see in your corporate records that you have a right to sell your business.
Make sure you don’t have any unexpected UCC filings filed in your county courthouse or state corporations division. Have lenders terminate any UCCs for loans that have been paid off.
When selling a business it is important to remember that a good buyer will scrutinize sales records, corporate records, tax returns and accounting records. When cleaning up your books leave no stone unturned.
Getting the most out of a business broker when selling your business
Finding the best business broker can make all the difference when selling your business. They should be interested in your business enough to learn as much as they can about your company’s strengths and weaknesses. In some states they must be regulated by the same regulators that regulate real estate sales. You should look for someone with quite a bit of experience, preferably in your industry. There should be good chemistry between you and your business broker. You need someone who will tell you what you need to know, not simply what you want to hear. The final negotiations with a buyer or buyer’s rep is where the business broker earns his fees. There are often issues that come up at the last minute. Financing often changes. Things happen. Having strong attention to detail is something you need in a business broker.
If you have someone who is not affiliated with the business broker help you take inventory of your tangible and intangible assets you will find it is much easier to evaluate business brokers.
How is your buyer going to finance the purchase of your business?
Finding a buyer is hard. Finding a financially qualified buyer is even harder. Knowing how your buyer is likely to be financed will help you get the most from the process. Your buyer generally will need to provide their own funds for any goodwill or intangible assets of the company. Banks and commercial lenders will not typically finance these soft assets. Examples of soft assets include formulations for proprietary products you may make, patents, and the unearned value of contracts you may have that are generating revenue. These assets are not usually found on the company’s balance sheet but nonetheless have value. Sometimes it is these “hidden” assets of your company that have the most value.
Buyers usually have some sort of bank or commercial financing. Those financing sources will finance the hard assets of your business (at fair market value). As you consider the assets in your company decide what the fair market value of the hard assets are with the help of an independent third party as mentioned above.
The more you can know about how the sale of your business can be financed the smoother the process will go for you
Having financed many buyer purchases over the last 20 years, I have the unique perspective of knowing what a bank or commercial lender is looking for in a business sale transaction which is one critical aspect sellers should know to maximize their own results. For a free consultation feel free to call me at 512-990-8756.