If you’ve read this far, then selling your business has aroused enough curiosity that you are taking the first step. You don’t have to make a commitment at this point; you are just getting informed about what is necessary to successfully sell your business. This section should answer a lot of your questions and help you through the maze of the process itself.
The first question almost every seller asks is: “What is my business worth?” However, we’re going to put this very important issue off for a bit and cover some of the things you need to know before you get to that point. Before you ask that question, you have to be ready to sell for what the market is willing to pay. If money is the only reason you want to sell, then you’re not really ready to sell.
It doesn’t make any difference what you think your business is worth, or what you want for it. It also doesn’t make any difference what your accountant, banker, attorney, or best friend thinks your business is worth. The typically don't understand what is involved in selling a business. Only the marketplace can determine what your business is worth. The value is a function of what a willing and able buyer, having all the facts is willing to pay. The key is to expose the business to as many qualified buyers as possible (confidentially) to make sure enough people see it to generate the best price and terms. This is where a professional Certified Business Broker can help.
The second question you have to consider is: Do you really want to sell this business? If you’re really serious and have a solid reason why you want to sell, it will most likely be successful in selling your business. You can increase your chances of selling if you can answer yes to this second question: Do you have reasonable expectations? This is an important question. Do you think your business is worth more then what the marketplace is willing to bear? Are you only willing to sell if the offer is all cash? If your expectations are reasonable given the current environment of the marketplace, then you will increase your probability of selling. The yes answer to these two questions means you are serious about selling.
The First Steps
Okay, let’s assume that you have decided to at least take the first few steps to actually sell your business. Before you even think about placing your business for sale, there are some things you should do first. The first thing you have to do is to gather information about the business.
Here’s a checklist of the items you should get together:
- Three years’ profit and loss statements
- Federal Income tax returns for the business
- List of fixtures and equipment
- The lease and lease-related documents
- A list of the loans against the business (amounts and payment schedule)
- Copies of any equipment leases
- A copy of the franchise agreement, if applicable
- An approximate amount of the inventory on hand, if applicable
- Locate your corporation book and update it, if need
- The names of any outside advisors
If you’re like many small business owners you’ll have to search for some of these items. After you gather all of the above items, you should spend some time updating the information and filling in the blanks. You most likely have forgotten much of this information, so it’s a good idea to really take a hard look at all of this. Have all of the above put in a neat, orderly format as if you were going to present it to a prospective purchaser. Everything starts with this information.
Make sure the financial statements of the business are current and as accurate as you can get them. If you’re halfway through the current year, make sure you have last year’s figures and tax returns, and also year-to-date figures. Make all of your financial statements presentable. It will pay in the long run to get outside professional help, if necessary, to put the statements in order. You want to present the business well “on paper”. Buyers will also expect things to be in order. If not, they will be turned off and move on to another business.
As you will see later, pricing a small business is typically a function of cash flow. This includes the profit of the business, but also, the owner’s salary and benefits or perks, depreciation, and other non-business related items. So don’t panic because the bottom line isn’t what you think it should be. By the time all of the appropriate figures are added to the bottom line, the cash flow may look pretty good. It is very important that this calculation is done correctly as it will be the bases for the value. A Certified Business Broker can prepare this analysis.
Prospective buyers eventually want to review your financial figures. Buyers today are much more informed and typically know what to look for. Buyers want to see the historical income and expenses and understand the cash flow over a period of time. Buyers need to feel comfortable that the cash flow will cover any loan payments and still provide a paycheck or profit to cover their cost of living. Let’s face it, if your business is not making a living wage or after debt profit for someone, it probably can’t be sold. You may be able to find a buyer who is willing to take the risk, or an experienced industry professional, but they will typically pay the least amount to off-set the risk.
The big question is not really how much your business will sell for, but how much of it can you keep. The Federal Tax Laws do 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 business a corporation, partnership or proprietorship? If you are incorporated, is the business a C corporation or a sub-chapter S corporation? The point of all of this is that before you consider price or even selling your business, it is important that you discuss the tax implications of a sale of your business with a tax advisor. You don’t want to be in the middle of a transaction with a solid buyer and discover that the tax implications of the sale are going to net you much less than you had figured.
Working with a professional Certified Business Broker will increase your chances of a smooth, fair and successful transaction!
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