So you want to sell your business...
By Bob | September 07, 2010
In the past few months I've had clients come to me that have expressed an interest in selling a business and want to know what steps to take. Here are some basic principles to consider. Bear in mind that I am not offering legal advice and I am not a business broker.
1) What's it worth? For most owners of small businesses the answer is, "less than you think." Someone who has worked for 25 years as a plumber, taken home $75,000/year for the last three years and has steady work lined up for a few months might want to get $250,000-$400,000 for their business. After all, they've been building this for 25 years! The reality will be much lower than that. What is actually being sold? Equipment? The company name? A book of business? Each of these can be valued (some with more difficulty than others). In the case of the plumber, there might not be a lot of equipment, the business is probably the name of the plumber and there are probably no regular recurring customers. What exactly does the purchaser get? I don't say this to discourage the sale, only to bring the expectations down. You need to have an accountant and an attorney advise you in this regard. What are the liabilities and assets of the business? What are the tax implications of selling the business?
2) What does a buyer need to know? Two years ago I looked at buying a small manufacturing business. It was in an industry that I knew, the owner was willing to finance it and the company was successful (according to the owner). When I asked to see financial statements and tax returns, the owner brushed off the idea. When I insisted that it would be necessary if I was going to seriously consider a purchase of this size, they were produced. As I looked over the documents, the owner could sense my concern/irritation and said, "Well, we don't really want to make any money because then you have to pay taxes." The reality was vastly different than how things had been presented and I walked away.
I tell that story because the first thing you will need to do will be to pull together 3 years of tax returns and financial statements. This is especially important for business owners who report their income on a Schedule C. If there are relevant statements that go back further than 3 years, gather those together as well. You will also want to spell out any existing contracts with customers and vendors that are currently in place, any future work that you are certain to get and a client list. You want to show without any doubt that the business is viable (if, in fact, it is.)
3) Get ready to answer questions. Why are you selling? What's wrong with the industry? Why now? Why such a high price tag? Will you finance it? Etc. An informed buyer will have many questions for you. That's okay. If they are serious about buying the business they should be asking lots of questions.
4) Who do we sell it to? I tell my clients to start with the easiest potential sales: employees, family involved with the business, local competitors. These three groups are most likely to have an interest in the business. If those don't seem like a good fit or if they aren't interested, I recommend listing the business for sale in a trade publication. This will give you a broader audience of individuals/businesses that would be interested in your company. From there, talk to a business broker about listing the business for sale. I should note that a solid argument can be made for talking to a business broker at the outset and using their services. A good business broker should be able to help you value the business appropriately and should bring more for the business than the cost of their commission.
5) Why are you selling? One of the questions that a prospective buyer will have is one that you need to have thoroughly considered yourself. Why are you selling this business? Are you moving? Retiring? Changing careers? Getting rid of a messy situation? If the business is profitable, why not stay involved? If the business isn't profitable, who would want to buy it? Is it possible to remove yourself from ownership and stay on in an advisory or part time role? Is this what you really want to do? These questions must be answered and they must be answered well. You need to be in a comfortable position when you sell your business. If you are under duress or are uncertain, you probably won't get enough for the business.
After reading all of this, I hope I haven't discouraged you from selling your business. What I tell my clients is this, "Make your money now from the business and if you sell it someday, consider that an unexpected bonus. Don't make plans based on what you might get for the business!"
I hope this helps you.