Owning a small business isn’t easy. And when it’s time to sell your small business, that process isn’t easy either. Just like owning and operating, selling requires long hours and hard work but can be extremely rewarding in the end.
Although the selling process can be complex and demanding, there are ways to make it easier while ensuring that you get the highest price and the best results for the business you’ve worked to build.
Of course, the first step to making the selling process easier is to get educated and find out exactly what you need to know. As you head through the selling process, you’ll want to understand the answers to these eight things.
1. Why Are You Selling Your Small Business?
The first question to ask and be able to answer is why you are selling your small business. Buyers are likely to ask this question before anything else so it’s a good idea to have an answer. Beyond the buyer’s benefit, remembering why you are selling your business will help motivate you during the process.
There are plenty of reasons to want to sell a business from personal to professional. Whether because you’ve decided to retire, or because you’re interested in heading in another direction, once you’ve determined your reason (or reasons) for selling your business, you are ready to get started.
2. When Do You Want to Sell Your Business?
The selling process is no quick transaction. The time between finding a buyer to the final transfer of ownership can reach a year or two very easily. Beyond that, preparing your business to put up for sale will likely lengthen the process. Knowing the end date when you want to sell your business and beginning preparations up to three years in advance should set you up for success in your sale.
Understanding how long the process may take can be discouraging, but it’s vital to avoid rushing the sales process. Cutting corners and failing to prepare sufficiently may lead to legal, financial, and or emotional conflicts later on. But while the sales process must be given its due time, hiring a sales broker may speed up the process. An experienced broker will understand the ins and outs of selling a small business and have the know-how to efficiently work through the process with you, safely minimizing the time it takes to sell.
3. What Is the Value of Your Small Business?
Knowing the value of your business is crucial to the selling process, and making sure your valuation is done correctly can prevent you from losing out on thousands of dollars. While the general rule is that your business is worth three to six times your yearly profits, that number can vary depending on the riskiness of the business and its potential in the market.
Your business valuation can be completed through a variety of methods, but it’s likely that this is the type of task to leave to the professionals. If you prefer valuing the business yourself, The Appraisal Foundation is a good place to start. Otherwise, valuation services can be provided by professional valuation companies, or by your sales broker if you choose to use one.
4. What Will Make Your Business More Attractive to Buyers?
As you think about selling your small business, think about what will make your business appealing to sellers. The more interest your business has, the more likely you are to find a buyer who you are excited to sell to. Besides also avoiding issues mid-sale, making sure certain elements of your business are in tip-top shape will also make it easier to sell closer to six times your annual profit rather than the lower end at three.
Clean Financial Records
Making sure your small business’s financial statements and records are in order is essential in the selling process. Financial records are the first thing every buyer and their lawyer will need to see before agreeing to move forward.
You’ll need to prepare somewhere around the last three years of tax returns and business financials so that your buyers can be satisfied that they are well informed. These documents will need to be spotless and comprehensive so have a small business accountant work with you to make sure everything is ready to show.
Buyers will be most enticed by a business with a lot of potential, and there’s no better way to give them a taste of that potential than by increasing sales and boosting profits. Sales can be boosted in a number of ways including increased marketing budget, introducing product discounts and specials, hosting events, and more.
Sometimes the best way to improve sales is through straightforward tried and true methods. Sometimes the best way is to get creative to find new ways to appeal to your audience. Consider the community your small business serves as you brainstorm so that you can appeal to the people who have patronized your business over the years.
Upgrade the Space
While looks aren’t everything, they certainly don’t hurt. A fresh coat of paint and a deeper clean than usual can help buyers feel more excited about new beginnings with your small business.
Beyond that, upgraded equipment or store features may be a small item that ends up helping sell your business. In some industries, more equipment means more commission opportunities, helping boost profits before the sale. Equipment leasing in particular is an item best considered a few years before you plan to sell so that you can utilize equipment leasing or financing before putting your business on the market.
5. What Documents Do You Need?
Organizing a sale means organizing a large amount of paperwork. As you process your sale, work with a lawyer and small business accountant to help review all the necessary documents.
As discussed before, financial statements and tax returns from the last three years will need to be reviewed by you and your team as well as the buyer and their team.
Part of the sales process will of course include a sales agreement. This document can be drafted by you, but including a lawyer familiar with contract law to help review in this step will ensure that nothing important is left out. Consequences of a faulty contract can be extremely expensive later on.
Beyond contracts between you and the seller, contracts with clients, non-compete agreements, employee contracts, and the like will need to be collected and organized for the sale.
List of Assets
Among your documents should be a list of assets from physical property and equipment to copyrights and intellectual properties. These will need to be included in your sale contract.
Your documents should include a business operations manual to help buyers understand the management requirements with your business and how your operations are conducted. This information will also allow for a smoother transition of ownership once the sale is finalized.
6. How Will You Sell Your Small Business? Broker or No Broker?
One of the biggest questions to answer is how you want to sell your small business, specifically if you would like to hire a sales broker or not. Brokers will generally charge somewhere around 10% of the final sale price of your business or a minimum, whichever is larger. For many sellers, a broker will be far more of a boon than a burden. It is in their best interests to get the best price for you and to make sure the sale goes smoothly. Beyond that, a professional broker will know the ins and outs of the sales process and should be able to help in almost every step of a long and taxing process. From finding buyers to finalizing the details, a broker can point you in the right direction and help in many different areas.
For other sellers, a broker may not be necessary. With plenty of small business resources to be found from the SBA or NFIB, a savvy business person can make the necessary arrangements to sell their business and save on the broker costs. This option is most ideal for simpler arrangements like in the case of selling to a trusted family member or employee.
7. Are Your Potential Buyers High Quality?
Once your small business goes on the market, you’ll then need to meet with buyers and decide which ones to move forward with. Part of the selling process involves putting your business in a vulnerable position by sharing highly detailed and sensitive information. Not all offers are genuine, and competitors may try to put a false offer down in order to gain access to it. Carefully vet buyers to make sure that their offer is real. You also may want to protect your business with a non-disclosure agreement (NDA) to assure your information isn’t compromised.
Another way to make sure offers on your business are good is to pre-qualify your buyers. Most deals will be financed by a third party, so assuring that your buyer will be able to secure that loan will allow you to spend your time on serious candidates rather than those unable to deliver in the end.
8. What Is Your Exit Strategy?
An exit strategy is critical for any business owner whether they plan to sell the business soon or not. A contingency plan for emergency situations is necessary to provide safe work for employees and owners alike. In many cases, the sale of a business isn’t due to unexpected issues, but there are a couple of things to make sure are covered in your exit plan.
Depending on the deal you make with your buyer, payment for the business may occur in one lump sum, or over time in a lease or gradual payment plan. Upfront payment is the most ideal for the buyer but may not always be possible for the seller. Make sure to consider the potential issues for gradual payment options. If the business fails under new management or the new owner faces other unexpected hardships, money may be lost for you.
Day to Day Operations
Part of your exit strategy will need to cover the day-to-day operations of your business. Who will be taking the reins and how long the transition process will take should be considered as you plan.
Handling Newfound Wealth
In ideal circumstances, selling your business brings you a large influx of funds to do with as you need and please. After selling, take time to adjust to the idea of the money you’ve gained before spending it. Make sure that you know what you need and want the money for before making big decisions.