Selling A Business Tutorial
Is it time to sell your business? You have devoted your time, money, and energy to building, running, and operating your business. It may well represent your life's work. If you have already decided that now is the right time to sell your business, you want the very best professional guidance you can get. This is when working with a professional business broker can make the difference in selling your business for the very best price and terms!
Following are some of the most common topics and questions frequently asked by sellers. If you have any questions that we have not covered, please don't hesitate to contact us.
For Business Sellers
If you've read this far, then selling your business has aroused enough curiosity that you are taking the first step. This section should answer some questions and help you through the maze of the process itself.
The first question almost every seller asks is: "What is my business worth?" Quite frankly, if we were selling our business, that is the first thing we would want to know. However, we're going to put this significant issue off for a bit and cover some of the things you need to know before we get to that point. Before you ask that question, you need to know what potential buyers in the market are willing to pay. If money is the only reason you want to sell your business, then you may not be a motivated seller.
You may have an idea of what you think your business is worth or what you want for it. You may have also gotten an opinion from your accountant, banker, attorney, or best friend about what your business is worth; however, only potential buyers in the marketplace can decide what the value of your business is. The way to get you the best price is to get you as many qualified potential buyers as possible to enable multiple bids and competition for your business.
Another question to consider is: "Do you really want to sell your business?" If you're serious and have a solid reason (or reasons) why you want to sell your business, it will most likely happen. You can increase your chances of selling your business if you can answer yes to the second part of this question: "Do you have reasonable expectations?" A yes answer to these two questions means you are serious about selling your business. Before we market your business, we'll make sure that we will evaluate your financial information to provide you with a pricing expectation and make sure that we are on the same page with this. We work on a commission-only basis, so we want to feel comfortable that we can meet your expectations.
The First Steps
Okay, let's assume that you have decided to at least take the first few steps to sell your business. There are a few items below which are helpful in selling your business:
- Three years' profit and loss statements
- Federal Income Tax returns for the business
- A current Year to Date Financial Statement
- The approximate value of equipment and fixtures
- An approximate amount of the inventory on hand, if applicable.
If you're like many small business owners, you'll have to search for some of these items. After you gather some of the items, we can help you review the information and get it in a presentable format. It's a good idea for us to really take a hard look at all of this and help you have all of the above in a neat, orderly format so that it can be presented to a prospective purchaser.
Make sure the financial statements of the business for sale are current and as accurate as you can get them. If you're halfway through the current year, the year-to-date figures are essential to show the current trend. In some cases, you may need to get your accountant to assist with providing us with the necessary information. You want to present the business opportunity well "on paper." Pricing a small business is often based on cash flow. This includes the profit of the company, as well as the owner's salary and benefits, the depreciation, and other non-cash items. So if the bottom line isn't what you think it should be, by the time all of the appropriate owner's benefits are added to the bottom line, the cash flow may look a lot better. For more on business valuations, you can read Valuation Factors.
A Balance Sheet is not as important typically as an income statement, but many buyers will want to understand this as well. Buyers definitely want to see income and expenses. They want to know if they can make the payments on the business for sale and still make a good return on their investment. We focus on selling companies that have annual net cash flows (including the owner's salary and benefits) of $250,000 to $7 Million, so hopefully, your business falls within that range.
An important consideration, in addition to how much your business will sell for, is how much of it can you keep? The Federal Tax Laws determine how much money you will actually be able to put in the bank. How your business is legally formed can be important in determining your tax status when selling your business. For example: Is your company a corporation, partnership, or proprietorship? If you are incorporated, is the business a C corporation or a sub-chapter S corporation? There are also tax rules that impact certain businesses on seller financing. The point of all of this is that before you consider price or selling your business, it is vital that you consider the tax implications of the sale of your business. You don't want to be in the middle of a transaction with a solid buyer and discover that the tax implications of the deal are going to net you much less than you had figured.
Who are the Buyers?
The buyer may be a private equity company or another company looking to expand through acquisition. The buyer might also be an individual buyer. We will market to a variety of different types of buyers and try to find the most qualified buyers to buy a particular business. Buyers buy businesses for many of the same reasons that sellers sell businesses. Here are just a few of the reasons that buyers buy businesses:
- A company looking to expand their current business through an acquisition
- A company that is interested in buying a business that will be complementary to its existing business.
- An individual that took Early retirement and has built up significant funds to invest
- Private Equity Group that wants to make a profitable investment or has another business that would be complimentary.
What Buyers Want
This may be a bit premature if you have not decided to sell, but it may help in your decision-making process to understand who the buyer is and what they will want to know to buy your business. Here are some questions that you might be asked and should be prepared to answer:
- Will the seller train and stay on for a while?
- What makes the business different/special/unique?
- What further defines the product or service? Bid work? Repeat business?
- What can be done to grow the business?
- What can the buyer do to add value?
- What is the profit picture in bad times as well as good?
- How much money is required to buy the business?
- What is the annual increase in sales?
- What is the debt?
- Do you have any lawsuits?
Buyers Want Cash Flow
The first thing to keep in mind is that the vast majority of business buyers want to buy cash flow. Cash flow is not the same thing as profit. Most buyers look at the profit and loss statement or tax return, as well as owner or family compensation and an owner's benefits and perks. They will consider any excess compensation to employees and family. Buyers will also look at significant, one-time expenses such as a new computer system or remodeling. They will consider non-cash items like depreciation and amortization. Interest expenses will be reviewed, as will owner prerequisites. These are items that a professional business broker and M&A advisor consider when advising a selling client on a selling price. We can help to restructure your financial income to provide an accurate picture of all of the owner's benefits.
What Can You Do?
Many things add value to your business, such as customer lists, proprietary products and/or techniques, well-maintained equipment, customized software programs, or good employees. These are termed "off-balance sheet items," and although not used in most pricing models, they add to the value. Look at your business very carefully, so you don't overlook those items that make your business more attractive to the buyer.
Eliminate the Surprises
Before you put your business on the business for sale market, we can help you eliminate the surprises! It's a good idea to review each facet of the company and remedy any problems that could appear during the sale process. No one likes surprises - most of all, potential buyers. Whether legal, accounting, environmental, or anything else - try to address it now.
We look forward to working with you to find a suitable buyer for your business. You, as the seller, are an integral part of the total marketing program. Below you will find a couple of recommendations that will help in our marketing efforts when you decide you are ready to sell.
- Keep normal operating hours. There may be a tendency to "let down" when you put your business up for sale. However, it's essential that prospective buyers see your business at its best. Make sure your business doesn't look as if it has been neglected. If you have inventory, maintain it at a constant level.
- Do your best to keep revenues and earnings moving in a positive direction. A business that is declining will adversely affect the value of the company.
It might also be helpful if you took a good look at your business from the perspective of a buyer. Try to put yourself in the place of a prospective purchaser of the company. What would you do to make it more attractive or more saleable? The financial records of your business are critical to the sale of your business. First impressions count! If you have any questions, please don't hesitate to call us. We look forward to hearing from you!
Do You Have Other Questions?
Synergy Business Brokers specializes in selling businesses with annual revenues of $700,000 to $70 Million in the following industries: technology, distribution, construction, manufacturing, healthcare, services, engineering, education, and transportation. View our corporate video at Synergy Business Brokers on Youtube.
For a confidential consultation, please fill out our Seller Registration or call us at (888) 750-5950. We can help you answer some of the following questions: