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Value Acceleration & Exit Planning

Selling a Small Business in Seven Steps

Selling a small business is a complicated process that necessitates a number of factors. You may need to hire a broker, accountant, and/or an attorney. The business structure, reason for the sale, timing, and soundness of your business functions will all influence whether you benefit.

The business sale will consume a significant amount of your time, and once the business is sold, you will need to figure out how to manage the earnings. Keep in mind that while each business sale is different, the fundamentals remain the same, and there are established methods you can follow to obtain the best outcome.

A Guide to Selling a Small Business

You are more likely to maximize revenue if you are well-prepared. Following are seven steps that will assist you in developing a good strategy and negotiating successfully.

1.     Identify Justifications for the Sale

When a business goes on the market, one of the first questions a prospective buyer will ask is ‘why are you selling it?’ Some of the most prevalent reasons for business owners to sell their companies include retirement, disputes in partnerships, ailment or death, and/or too much workload.

Often, owners consider selling a business if it is not bringing in the required revenue. However, this reason for selling a small business makes it more difficult to find purchasers. One approach is to take into account the company’s capacity and readiness to sell and timing.

There are numerous characteristics that might make your company appear more appealing, including increasing profits, consistent income numbers, a loyal clientele, and a multi-year contract in the works. The idea is to identify your reason for the sale and highlight the factors that make your business attractive.

2.     Prepare the Business for Sale

Prepare your business transition plans as early as possible, preferably a year or two ahead of time. The planning will assist you in improving your financial records, business structure, and customer base to increase the profitability of your company. These enhancements will also aid the buyer’s transition and keep the business functioning smoothly.

Selling your company to other partners is a frequent means of transferring ownership, especially for small businesses. Having a pre-sale agreement in place with your partners will help to ease the transition, boosting the chances that both the remaining and outgoing partners will benefit.

3.     Work with a Business Appraiser

Once you are ready to sell, hire a reputable business appraiser to determine how much your company is worth. The appraiser will write a detailed description of the company’s value. The document will give your asking price more credibility and can be used as a benchmark for your listing price.

A professional business evaluator can provide you with an objective estimate of the value of your company. You can also look at market capitalization, earnings multipliers, book value, and other variables to assess value.

4.     Consider Hiring a Business Broker or Investment Banker

Many business owners think they will save money by selling the business personally rather than paying a business broker or investment banker. This approach may work well if you have invested significant time and effort into business succession planning or are selling to a trusted family member or present employee. In other cases, the hazards of selling on your own may exceed the cost of a broker or investment banker.

A business broker or investment banker will help you save time so you can focus on running your company. They can keep the sale of your business discreet to ensure you obtain the best price. A broker or investment banker will most likely be able to negotiate a contract that is better than the one you would have negotiated on your own. It is advisable to discuss your expectations and advertisements with the broker or investment banker in detail to ensure that the desired results are achieved from the sale.

5.     Prepare Required Documents

Review your financial statements and tax returns from the last three to four years with an accountant. Make a list of the goods/services that are being sold along with the business. Make a contact list for sales transactions and supplies, as well as any pertinent documents, like a current lease agreement. Make duplicates of these documents to provide to financially qualified buyers.

A summary of how the business is run or an up-to-date operating manual should also be included in your information packet. Make sure that your company is well-presented. Any broken or worn-out aspect of the business or equipment should be repaired or replaced before the sale to maximize profits.

6.     Identify Potential Buyers

Selling a small business might take anywhere from six months to two years. It can be difficult to find the proper buyer. A business broker or investment banker will solicit buyers for a seller as part of their service.

The business broker or investment banker will approach other potential buyers with ideas that may interest them in your business. They will conduct research, build a presentation, and identify potential targets. While a patent is the best way to protect some business strategies, others can be safeguarded by getting a potential partner to sign a nondisclosure agreement.

Two to three potential buyers should be lined-up in case the first agreement falls through. The business broker or investment banker will maintain communication with prospective purchasers. Find out if the possible buyer is pre-qualified for financing before disclosing details about your company. It is a good idea to allow some leeway for negotiation but stick to a sensible price that reflects the company’s worth.

If you plan to finance the transaction, consult an accountant or lawyer to iron out the specifics so you can quickly reach an agreement with the buyer. Any agreements should be in writing. To secure your information, potential buyers should sign a nondisclosure/confidentiality agreement.

Multiple legal documents will be required following the sale, including a bill of sale, lease assignment, and security arrangement. Furthermore, the buyer may need you to sign a non-compete agreement, in which you pledge not to open a competing business that would steal clients.

7.     Make Future Financial Plans

Before spending the proceeds from the sale, give yourself a few months to make important financial decisions. It is advisable to make a financial plan and learn about any tax implications resulting from the sale. You should also speak with a financial adviser about how you want to invest the money and focus on long-term goals like debt repayment and retirement savings.

The Bottom Line

Selling a small business can be an emotional endeavor. However, a compelling motive to sell in a “hot” market, as well as professional assistance, can help alleviate the strain. Rushing through the sales process is not recommended, even if you are selling to a close family member or coworker.

It is never too early to start exit planning or business succession planning for your business. Connect with Windes today to strategize the future of your small business and maximize gains on that future sale.

Robert B. Henderson, CPA, MST, CEPA, CM&AA

Connect with Rob to strategize the future of your small business and maximize gains on that future sale.

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