How and When to Sell a Business
Most business owners have put considerable time and energy into their business, and the decision to sell the business can be particularly difficult. Unlike most business decisions you'll ever make, you only get one shot at this to get it right, so it pays to know what to expect and plan carefully before you sell your business.
Deciding When to Sell a Business
Ideally, you want to sell your business when the economy is doing well, you've had a profitable year, and the future forecast for your business is positive. Realistically, deciding when to sell a business will often turn more on personal considerations and economic realities than on ideal market conditions.
Accordingly, it can be extremely helpful to sit down and decide what matters the most to you, and how much will be "enough" to let you walk away from the business. If you can achieve what matters the most to you, and can expect to receive enough compensation to make it worth your while, then it may be the right time to sell.
Finally, selling a business can be a long and arduous process, so start planning well in advance. Selling a business can take up to a year to complete, and sometimes more, so don't expect to flip your business like you might a house.
Determining the Value of Your Business
Setting a value on years of hard work and effort can be a difficult undertaking. Many business owners make the mistake of setting the selling price too high because they're valuing the business based on their hard work, rather than its real-world value. Accordingly, it can be helpful to have an outsider, a business appraiser, do the work for you.
Many business owners are reluctant to spend any money on getting an appraisal, but like many business decisions, some investment up front can return big dividends down the road. Business appraisers will generally be accountants (CPAs), and can give you specific values for your assets, but they can also help you out with valuing the intangible assets, things such as "good will" or "going-concern". A key benchmark to consider is that you should be able to sell your business for more than the worth of its simple assets. Finally, having a business appraisal looks considerably more professional, and when you're selling something, appearance can be everything.
Looking for Buyers
Finding a buyer for your business can be extremely difficult, because the "market" for selling businesses is fractured and inconsistent. This is especially true for small business owners, and is one reason that selling a business can take up to a year or longer.
If you want to go it alone, then finding similar businesses in your area is probably the easiest place to start. Other places to look for potential buyers include larger regional or national businesses that may be interested. Finally, an often overlooked pool of potential buyers includes your community of local business peers. Even if a different local business owner doesn't want to buy your business, chances are good he may know someone who does.
The other option is to hire a business broker or a mergers and acquisitions professional. Like a realtor, these professionals should have a good understanding of your potential buyers and the local market, which can be extremely helpful.
Financing the Sale of Your Business
It's unrealistic to think that someone will come along and offer you a large lump-sum payment for your business it happens, but it's not typical. Instead, consider how the sale of the business will be financed.
The most obvious way to finance the sale would be through a third party, such as a bank or similar institution. If this is how the buyer expects to complete the deal, make sure that the lender confirms that the buyer is qualified and that the lender is willing to extend the money.
The most common way to finance the sale of your business is through seller-financing. This form of financing is actually the most common form of financing in small and mid-sized sales, so expect the buyer to look to you for financing. If you are unwilling to finance at least part of the sale, then you may find it extremely difficult to sell a business.
While seller-financing is extremely common, it pays to be very careful when structuring the financing. The new business owner could burn through all of your hard work very quickly and stop making payments long before the loan is paid off. Accordingly, you should consider requiring the buyer to offer more collateral than simply the business itself to secure the loan.
Essentials of the Agreement
Your sales agreement is the most important document in the sale of your business, so make sure to have an attorney review it. Your agreement should set out everything that you intend to sale and include at the very least:
- Names of the buyer, seller and your business
- The assets being sold
- The purchase price
- Payment terms
- A list of inventory included in the sale
- Terms regarding access to any business information
- Fees, including brokers fees
- Date of closing
- Compliance with any required state, local or federal regulations