Selling a business isn't easy - it's a complicated and tedious process. While every sale is unique, there are fundamental rules that you can follow to find an advantageous deal. Being well-prepared will give you the best chance at receiving maximum profits from your endeavor.
To ensure you obtain the highest price possible when selling your business, it's best to start preparing at least a year or two in advance. This will give you plenty of time to get everything organized and positioned for success. The value of your sale is dependent on multiple components including: hiring an experienced advisor, scheduling efficiently, and understanding why exactly you're selling in the first place. By taking into account these important elements early on, you can maximize your chances of achieving maximum market value.
Key Takeaways
- Before you can sell your business, it's critical that you have identified why you are selling and ensured that the company is in pristine condition. With those two areas addressed, all of which require a significant amount of planning, then it's time to consider timing.
- If you want to ensure the success of your sale, it's essential to plan ahead at least a year in advance. This will give you enough time to refine your financials, nurture relationships with customers and strengthen other key factors of your business that can help maximize its value.
- Estimate the worth of your business to ensure you set a competitive price. Hiring a qualified business appraiser (valuator) may be the best option for obtaining an accurate assessment.
- Consider your options carefully and determine if it's best for you to use a specialized M&A advisor or negotiate the sale on your own.
- Taking the time to gather your financial documents from recent years and examining them with a qualified accountant will better ensure success in managing your finances.
- Procuring a buyer for your business can be an extended process that may take several years. Once you find the perfect suitor, however, it is critical to quickly move forward with financial screenings and other necessary steps in order to keep the deal on track.
- Instead of recklessly expending all the money, set aside time to consult a financial advisor and decide how you'd prefer to allocate these funds.
Fun Fact: More than half of company sales in Germany are due to the owner wanting to retire
Crucial Steps to Successfully Selling Your Business
Here are a few strategies to help you make the most of your time and successfully navigate the sale process:
STEP 1: Obtain an expert assessment of the value of your business
Valuing your business can often be a tricky process - because of this, employing a reliable valuation firm is necessary in order to ensure that you are provided with an accurate value. Additionally, using third-party assistance increases trustworthiness around the asking price and makes potential buyers more likely to invest.
During the appraisal process, the appraiser will evaluate inventories, sales data, debts and other business assets to determine potential risks and establish a feasible price.
BUSINESS VALUE REALITY
Data demonstrates that the typical business owner has 80% of their net worth invested in their company. Therefore, it is essential for them to get ready and optimize the value of their business before putting it on sale if they want to secure a successful future after its closure.
Some businesses, as a rule of thumb, can be worth a multiple of X times its annual cash flow, or EBITDA, or other important metrics, depending on the market in their region, and their financial stability. For many smaller companies, assets don't constitute much of the company's value; rather it is more dependent on how well these resources contribute towards making a profit for the business. For very small companies, say for example, those with an annual cash flow of up to $100,000 are often sold at “small” multiples like 1.90 to their cash flow; whereas those over the mark of $300,000 (but less than $100,000,000) achieve prices as high as 2.81 times their income. However, this will vary with industry, segment, location, and general market conditions.
It is essential to recognize that business buyers are not content with mere cash flow; you must present a plan on how the company can prosper and grow even after you have departed from its leadership.
STEP 2: Gather and organize your financials
During the current economic downturn, buyers are only looking for businesses that have not only proven to be profitable but also offers long-term stability. Therefore, they will take their time researching and performing due diligence before presenting an offer; from equipment to real estate and business based financials - you need to make sure all of these details are up to date in order for your company's sale to succeed.
Consult with a business consultant or accountant and thoroughly review past financial documents and taxes going back 3 to 5 years. Additionally, make sure you create an inventory list of all the gadgets, machines and even intangible properties that you plan on selling along with the organization. Don't forget to include any intellectual property as well. In order to make your business more attractive to potential buyers, it's important that you provide them with information about the company and how it operates. Having an operating manual readily available can help prospective purchasers get a better understanding of your operations, thus demonstrating why yours is a turn-key operation for which they should consider investing in. Ensure that everything is presented in an orderly and helpful way for buyers, so they have all the necessary information. Be open about every detail of your product or service to provide them with full transparency - this will help ensure that customers are aware of exactly what it is they're purchasing. Establishing this can save you from potential headaches down the line, and will create a coherent timeline of both past and future business developments.
STEP 3: Enhance your business's sales performance
Establishing a prosperous income and multiple revenue streams makes your company highly attractive, so make sure you maintain the highest performance standards to drive profitability. Keep in mind that if you decide to sell when sales are declining, it can significantly decrease the price the buyer will pay. Increase your business value by optimizing your operations for maximum earning potential.
When seeking to purchase a business, buyers like to carefully review sales and gross profit records. To them, businesses with high year-over-year growth are more attractive since they signify that the enterprise is flourishing rather than merely existing. However, this is also subject to industry, region and market conditions. Additionally, astute buyers will inquire about contracts in place and whether or not these agreements can be transferred over accordingly. Not only will they assess the possible future income from your revenue streams, but also look for chances to generate regular income that can last years. One issue a potential buyer may have is when there are few customers involved with a business. With this in mind, numerous buyers take into account how many clients the company has when discussing terms of purchase as any customer departure could mean an important source of earnings being lost. To make your company irresistible to potential buyers, you must take steps towards increasing sales and diversifying your customer base. Diversification of customers, multiple income streams, and a top-notch small business administration team are all necessary for adding value to your business. By implementing these strategies now, you will be in the best position possible when it comes time for sale negotiations.
STEP 4: Determine the best time to exit
Experienced entrepreneurs suggest that small business owners should start preparations for their departure at least 12-24 months in advance. By having a plan, you'll be able to get your operations and records organized which will make the sale of your company more attractive to buyers. Things like increasing sales, tidying up financials, and even expanding a customer base may all help with this process. The reality is that only 20-30% of businesses placed on the market will actually be sold on a given year, so it's essential to know when to make your move. When you're trying to get a good payout from selling your business, you want things to look favorable for potential buyers; they should feel confident in investing in an expanding and lucrative endeavor. It's important not to expect overnight success. It falls on you to monitor the markets closely, so that your business can remain at the forefront of its industry. Don't wait until it's too late before selling – if you do, then not only will your profits suffer but also the value of your company itself. No matter the situation, planning ahead is always key. If you want to ensure that your business receives its maximum worth when it comes time for sale, then having an exit strategy in place from the beginning is essential. Don't let unforeseen circumstances catch you off guard - determine your exit plan early on.
STEP 5: Engage the services of a M&A advisor
When it comes to getting the best price for your business and finding you an excellent buyer, M&A advisors are right by your side. Count on them to assist you with:
Business valuation, negotiation and due diligence.
Assisting you in proper sell-side due diligence to guarantee a successful transaction closure To get the best possible prices for your assets, marketing and expanding your buyer pool is key. By listing your company with various industry specific buyers, you can increase future profits.
Other benefits include helping buyers obtain the financing they need by connecting them with an extensive network of financial institutions and private lenders, as well as assisting them in negotiating favorable contract terms for the sale.
Another important task of a broker is to evaluate potential buyers and ensure the confidentiality of all transactions.
The sales process can be very complex, with performing due diligence arguably the most challenging. Statistics show that over 50% of contracts fail at this crucial stage. However, when you work with a skilled advisor, you have someone you can rely on to guide you through these complexities so that your business remains an operational priority.
STEP 6: Screen potential buyers for suitability
Securing third-party loans is often a key factor in successful business acquisitions, yet many transactions come to an end due to buyers failing to acquire the necessary funds. To prevent this from occurring, it's essential that potential buyers receive pre-qualification before entering into any agreements with sellers.
Before you make a deal with any prospective buyer, there are several factors to think about. To ensure that the transaction is advantageous for both parties involved, review these key questions:
Have the buyer's financials been verified? Request a detailed set of financial statements to ensure that they have enough capital for both their down payment and six months’ worth of working capital. This will help guarantee that your potential buyers are prepared and able to finance this transaction.
Can the buyer proficiently operate the business and do they have prior industry experience? Although someone's lack of experience should not be necessarily disqualifying, it is more likely that experienced individuals within the same field will make better candidates.
It is important to inquire if the buyer has a feasible timeline for making an offer. Ask them whether they are ready to buy now or will require more time before proceeding with their purchase decision.
Although none of these steps are particularly complicated, if you neglect them, it can lead to a huge waste of time and resources - not to mention the risk that confidential information might be revealed before any deals are finalized.
STEP 7: Determine how to distribute the proceeds of the sale
Before you rush to spend the profits from your sale, take some time—at least a few months—and come up with an organized plan that outlines your financial goals. Research how these sudden changes in wealth can affect taxes and speak with a professional who understands what it takes to invest money wisely so that you can reap long-term benefits like getting out of debt and saving for retirement.
Your business is likely your most important resource and constructing an effective organization takes many years of commitment. If you are considering selling in the future, this guide can help you make a wise decision - enabling you to get the maximum value for your sale.
Navigating the Rules of Accounting
Adopting a clear and organized accounting process is crucial for posting transactions, creating financial statements, and your overall business success. Here are some of the reasons why:
Consistency: By adhering to the same process every month, you will always be able to generate precise accounting data. This way, there is a lesser chance of accidentally missing out on any transactions and making errors or inconsistencies in your statements. Additionally, having an established system that you follow each time could make potential buyers more confident in relying upon your financial reports.
Comparability: Die Einhaltung eines einheitlichen Prozesses gewährleistet, dass Ihre Ergebnisse von einem Monat oder Jahr zum nächsten konsistent und vergleichbar sind. Wenn Sie beispielsweise ein schriftliches Verfahren für die jährliche Verbuchung der Abschreibungen auf das Anlagevermögen festlegen, erscheinen Trends bei den Abschreibungsaufwendungen zuverlässiger, da es sich um ein einheitliches Verfahren für jeden Monat handelt.
By providing an efficient accounting system, your business will be prepared for any independent audit that may arise. For instance, if the auditor is analyzing inventory balances as part of their testing process, you can provide assurance knowing each inventory transaction was correctly recorded in addition to having access to detailed documentation with minimal effort. This eases the auditing process and significantly reduces time spent dealing with audit issues.
Make the time investment to follow these accounting rules of the road, because you’ll spend less time on a buyer’s due diligence process.
PROCEDURES MANUAL: The Guide for Achieving Successful Outcomes with small businesses
As a prospective buyer, one of the most attractive qualities you can offer is your demonstrated competency and experience in leveraging industry knowledge. Put this to work for you by formalizing your business processes into a comprehensive procedures manual - it could be the difference between success or failure when attempting to attract buyers.
Record the procedures you utilize for everyday duties in your company and who is responsible for each step. It's important that all employees access to this manual, because it eliminates any ambiguity about how certain tasks must be completed.
By documenting the setup of your accounting software and recording who has access to make modifications in relation to invoicing, you can ensure that your personnel are able to effectively process each invoice via automated email. This way, accuracy is guaranteed.
We are reaching the end of the article, but check this FAQ section if you have any lingering questions.
FAQ: How to sell a business
What should be considered when determining the value of a business for sale?
The steps for valuing a business for sale include: gathering financial statements and other relevant business documents, analyzing the business's financial performance, considering the condition of the business's assets and equipment, and considering the market conditions and competition. A business valuation professional or accountant can help with this process.
What costs should I anticipate when selling a business?
The cost to sell a business can vary greatly depending on various factors such as the size of the business, the industry it is in, and the sales process being used. Some potential costs to consider include legal fees, accounting fees, advertising costs, and broker fees (if using a broker).
How can I sell my business to a competitor?
To sell a business to a competitor, it can be helpful to approach them directly or to work with a broker who has connections in the industry. You can also consider offering incentives such as a transitional period to help smooth the transition and make the sale more attractive to the competitor.
How can I use the internet to sell a business?
To sell a business online, you can use websites or platforms that are specifically designed for buying and selling businesses. You can also use social media, business listings websites, or your own website to advertise the sale.
What can I do to sell my business quickly?
To sell a business quickly, you can try to make the business as attractive as possible to potential buyers by ensuring that it is well-organized and up-to-date, and by highlighting any unique or valuable aspects of the business. You can also consider offering incentives to help make the deal more attractive to buyers.
What is the process for selling a franchise business?
To sell a franchise business, you will need to follow the processes and procedures set forth by the franchise company. This may include finding a qualified buyer who meets the franchise company's requirements, negotiating the terms of the sale with the franchise company, and transferring the franchise agreement to the new owner.
How can I sell my share of a business?
To sell your share of a business, you will need to first determine the fair market value of your share and then find a qualified buyer who is willing to purchase it. It may be helpful to work with a business broker or attorney to assist with the sales process and to ensure that the necessary legal documents are in place. You should also consider the tax implications of the sale and any impact it may have on the ongoing operations of the business.
What happens after selling my business?
The manner in which a business sale is to proceed is critical to the legal premise of the sale process. There are two types: The share deal and the asset deal. In a share deal, the acquirer acquires all shares in a partnership or corporation. The employer remains unchanged and is still considered the company itself. Even if there is now a different owner or shareholder, this does not change the status of the entrepreneur as the employer who was originally responsible for this company. This means that the employment contracts remain intact in the event of a company sale in the form of a share deal, so that no special legal provisions need to be created for the employees and their existing contracts. In an asset deal, the legal implications are quite different. Here, the buyer does not acquire the shares of a company, but only individual assets of the company - usually customer relationships and contracts, inventory, land or buildings, and employment contracts. Not only the shareholders of a company change, but also the employers. This has far-reaching effects that are legally binding. According to Section 613a of the German Civil Code (BGB), both the previous and the new entrepreneur have certain rights and obligations when it comes to an asset sale in which a company is transferred in whole or in part.
Conclusion
Selling a business can be a complex process that requires careful planning and consideration. Many business owners choose to work with a broker or other professional to assist with the sale, as they can provide valuable expertise in areas such as accounting and financial systems, business valuation, and investing and retirement planning. It is important for business owners to have accurate financial records and to thoroughly evaluate the fair market value of their business and its assets. The tax implications of the sale should also be carefully considered. To increase the chances of a successful sale, it is helpful to identify qualified buyers and to make the business as attractive as possible to potential buyers.
