Are you ready to sell your most important asset and earn a hefty profit? Entrepreneurs and business owners can learn how to sell a business and reap the benefits of their hard work. Veteran entrepreneurs Cory Miller and Jeff Meziere have spent decades building and selling their companies. Because of their success at selling and acquiring companies, they created Exit Exercise to help other entrepreneurs sell their businesses.
Are You Ready to Sell?
Before you can look at how to sell your business, you need to determine if you are actually ready to sell it. This checklist on your company’s health will help you prepare your business for a successful exit. It takes five minutes to complete, and it will show you how healthy your business is right now. Before you can sell your company, you want to increase its value as much as possible so that you can fetch a higher price for it.
With a bit of preparation, you can improve the readiness of your most important asset. You can gain a realistic understanding of your company’s value and a new perspective about areas you need to work on. Before you sell your business, you will also need to improve your company’s financial statements and balance sheets. In addition, you need to practice your elevator pitch so that you can tell your company’s story in an appealing way to potential buyers.
Think Carefully Before You Decide to Sell
Selling a business is not as easy as it sounds. In addition, you need to have clear personal and business objectives for what you want out of selling your company. If you have run a family business for 30 years, selling it is a life-changing decision. Sometimes, entrepreneurs go through seller’s remorse after they sell a business that they spent a lifetime building. They may worry about their former customers and employees instead of focusing on achieving their next goals in life.
As a general rule, the best time to sell is when market activity is at its peak. If your business is doing well, then you may already be at a good moment for selling your company. You have to be careful about not waiting too long for the perfect moment to arrive because the overall state of the economy and your industry can always change.
Organize Your Financial Statements
Prospective buyers may like your brand image or location, but these factors are not enough to make them buy your company. If you want to sell your business, you have to show strong financial statements and tax returns. Your balance sheets, cash flow statements and other financial documents will show prospective buyers that they are making a good investment in your company.
You can start your preparations by gathering the last three to four years of financial statements and tax returns. Then, you should visit your accountant to go over them. This is also a good time to list the equipment that you will sell with your business. You should create a list of contacts for your vendors, sales transactions and supplies. If there is any paperwork regarding your current lease, you should find it and file it with the rest of your documents.
Once you have everything organized, make multiple copies of all of your documents. These copies will become information packets that you can give to prospective buyers. To make your information packet more useful and easier to read, add a summary at the beginning that covers how your business is conducted.
There are other documents and legal considerations you have to sort out before you can sell your business. For example, you will need to create the asset purchase agreement. These documents should cover your physical and intellectual property. In total, the asset purchase agreement will probably be 25 to 50 pages long. The agreement will include things like your asset listings, guidelines about website domain names, non-compete agreements and employee agreements.
Ask Advisors for Help
While you are not required to have a business broker, you may want to get one. Keep in mind that a business broker may charge up to 15 percent of the sale price you get for your company. If you choose to have a business broker, then you can enjoy a smoother, easier process. The broker will handle vetting buyers, answering questions and ensuring confidentiality. A broker can help you maximize the price you get. In addition, using a broker allows you to stay focused on running the business while you wait for an offer.
If you are selling to a current employee or family member, you may not need a broker. One of the broker’s main jobs is finding buyers. When you already have a vetted buyer ready to buy your company, you do not need a broker’s help.
Other than a broker, there are other advisors you may need to hire. An accountant is extremely important when it comes to preparing and understanding all of your financial paperwork. You will also need to hire a trusted, experienced attorney. Your lawyer will help you review contracts, offers and deals as you go through the sale process.
Ideally, you want to get ready for the sale of your business ahead of time. In general, business experts recommend preparing for the sale of your business one or two years in advance. This added preparation time will help you improve your business structure, sales revenue, financial records and customer base. When your business is already prepared for the sale, the transition process is easier for everyone involved.
As soon as you are ready to sell your company, you can start transferring assets into your name. While many assets will be included with the sale, you may want to retain some assets like intellectual property, cars or real estate. By transferring these assets, you remove them from the balance sheet’s expense column. In addition to making the sale easier, transferring assets will also make it easier for a buyer to understand your cash flow potential.
Justify the Price
You started your company, so your business is more than just an investment for you. Over the years, you have navigated each obstacle and developed new products. Because of this, it is easy to forget that the only value for your business is the value it holds for someone else. Ultimately, your business is only worth what someone else is willing to pay for it.
When the typical small business is sold to a new owner, it generally gets about double its annual cash flow. As the company’s cash flow increases, it can actually sell for more than double its annual cash flow. If a business has a cash flow that is less than $100,000, it will generally receive a sales price that is just 1.97 times its cash flow. In comparison, a company that receives a cash flow of $300,000 to $500,000 will get 2.81 times its cash flow.
Your cash flow is one of the key factors a buyer looks at when they decide how much to pay you. There are other ways you can justify a higher price. For example, a buyer will pay more if your business is booked for months or years into the future. If you have a track record of repeat buyers, you may be able to justify a higher price as well.
Plan Your Exit Strategy
There are a number of reasons why you may decide to sell your company. A prospective buyer will want to know why you would want to sell your business when you could keep it and continue to earn revenue. The following are some of the most common reasons why owners decide to sell their businesses.
- Partnership disagreements.
- Death or illness.
- Becoming overworked.
All of the previous reasons are entirely understandable. Some owners want to sell their business because it is not profitable. Obviously, buyers are afraid of purchasing a company that is not profitable. If your business is not earning a good profit, it will be much harder to attract potential buyers. Before you sell your business, you need to make sure it is ready and positioned for a quick, profitable sale.
As you learn how to sell a business, one of the many things you have to do is plan your exit strategy. Once you leave your company, the business must be able to keep operating without you. One of the ways you can achieve this goal is by training your employees to work well without you.
Ideally, you want to plan your exit strategy in advance. In many cases, small businesses are forced to sell because of a factor like an ill owner or a competitive threat. If you want to get the best price possible for your business, you need to plan out your exit strategy before you are forced to sell because of unforeseen events.
Find a Buyer
On average, it takes around six months to two years to sell a business. For most companies, it can be difficult to find the right buyer. You should be prepared to advertise your company so that you can find a buyer as soon as possible.
Once you have a buyer, there are a few steps you can take to speed up the sale process. You should try to get two or three buyers lined up in case your original deal does not go through. Then, you can reach out to all of your potential buyers and get them pre-qualified for financing. While you need to leave some room for negotiating, you should be fairly firm about your price.
If you make an agreement, you need to put it into writing to avoid any legal issues and misunderstandings in the future. In addition, you should get your potential buyers to sign a confidentiality agreement so that your information is protected. Afterward, you should get the signed purchase agreement into escrow. You may also need to take care of documents like the bill of sale, the security agreement, an assignment of a lease and a non-compete agreement.
To make the process go faster, you may want to pre-qualify your buyers. In most cases, small business transactions are handled through third-party loans. Many of these loans are backed by the United States Small Business Administration. In many cases, the reason that deals fall through is that the buyer is unable to secure financing.
You can avoid this by getting your buyers pre-qualified. While your buyer gets pre-qualified for a loan, avoid getting too excited about their offer. Instead, continue looking for prospective buyers in case the deal does not go through. Most banks will also require the buyer to provide some of the financing costs so that they have a vested interest in the company’s success.
Handle Your Profits
One of the final steps in learning how to sell a business is determining how to handle your profits. Once you find a buyer, you will eventually need to figure out where to put the profits of your sale. You may want to talk to your accountant or financial advisor about your financial goals. In addition, you should consider the tax consequences of your sudden wealth. Before you receive the profits of your sale, you need to determine how to invest the money such as saving for retirement or paying off your debts.
If you are ready to sell your business, ExitExercise.com can help. We have previously sold multi-million dollar companies, so we have experience helping entrepreneurs position their businesses for a successful exit. If you want to see if you are ready to sell your company, go through this checklist about your company’s current health. For more help and information, you can reach out to our company today.