Selling a Business
Various Facets of Selling a Business

Various Facets of Selling a Business

There are several advantages to using a business broker. The broker will allow you to maintain confidentiality if you don't want your intent to sell to be public knowledge. It saves you the time of talking to potential buyers, thus allowing you to focus on running your business Also, some prospects may be more comfortable, at least initially, talking to an intermediary about a business rather than talking directly to the owner. Also, a broker who specializes in a particular industry may have excellent contacts at larger corporations that might be interested in buying out your company at a higher price than an individual buyer might.

Nonetheless, a broker's fee is substantial and you will want to weigh the expense before you decide to list your business through a broker.

Partial sale
You may decide to sell part of the business, rather than all of it. If one segment of your operation is growing much more quickly than another, you may want to consider placing the less successful portion on the market. If you are able to sell it, you will have more money and time to invest in the remainder of your company.

In order to make a partial sale, you will have to break out the financial information and prepare a two-year profit and loss statement for the separate business segment you are selling. This may be tricky, and you might want to consider having an independent accountant perform the work or at least check yours out.

Financial statements
The basic financial information needed to sell most small businesses are profit and loss statements and balance sheets from the last five years of operation. If you are three or four months into a new fiscal year, you should also provide an interim financial statement.

One of the first questions a prospective buyer will ask is who prepared your financial statements. Even if you have prepared your own financial statements in the past, you should consider having an outside firm prepare or review them for the sale. This will increase the value of the business in the eyes of potential buyers and increase the likelihood of making the sale. If you decide against using an outside accounting firm to prepare your financial statements, offer to show copies of your corporate or, in the case of a sole proprietorship or partnership, personal tax returns to serious potential buyers. This will help to substantiate your businesses profitability.

Management agreements
Often the prospective buyer will express an interest in having the current owner continue to run the business after the sale takes place. If you are interested in doing this, be sure to get any such agreement in writing. Working relationships between new owners and ex-owners are often highly subject to friction!

Will anyone buy my business?
The only way to find out for sure is to place your firm on the market. Generally, a small business that is relatively new, unprofitable, or has a sharply declining sales history will be difficult to sell. Reviewing the simple valuation guidelines will give you some indication of how marketable your business may be.

The higher the suggested multiple of earnings for your business, the more chances you have of finding a buyer.

Valuation
The selling prices of similar businesses in your area will provide an indication of what you can expect to receive for your business. Do note that we are talking selling price, not asking price. Typically, small businesses sell for significantly less than the asking price.

Sophisticated buyers might evaluate your business on the basis of projected cash flow for the next few years. They will then discount the value of that cash flow to reflect the amount of risk inherent in the business and the importance of their personal efforts in maintaining the success of the business. They will also consider what their money could be earning in a "risk free" investment such as a U.S. government Treasury bill.

Selling to larger corporations
Sometimes it is possible to sell your business to a larger corporation for more than it is worth to an individual buyer.

A larger corporation that is active in the same business area you are may be able to improve on your profit margins by folding your business into one of their business units. It might also be able to eliminate or reduce back-office expenses such as accounting or warehousing and sales expenses such as paying independent commission representatives by using their own staff and facilities.

Also, a larger corporation that is trying to grow quickly in a new strategic area may be willing to pay a fat premium to quickly acquire market share.

Any corporation with which you are currently engaged in any type of cooperative effort should be targeted as a potential buyer.

Attorneys
There are two areas where it is strongly suggested that you consult with an attorney when selling a business. The first instance is when you prepare a circular or prospectus summarizing your business for potential buyers, and the second is when you prepare a purchase and sales agreement.

While you may have operated your business successfully year after year, a new buyer without your particular skills, expertise, or personality may easily run into problems. If the business turns out to be less successful or easy to run than the buyer anticipated, he or she may assume that the business was fraudulently represented. One way to reduce the risk of litigation in this is to have an attorney review your circular or prospectus. The attorney will undoubtedly advise you to avoid projecting future sales or profits or at least be extremely careful when doing so. Even if you are selling a very small business, you should have your attorney review, if not actually prepare, the purchase and sales agreement. Buying and selling businesses is often much more complex than, for example, making real estate transactions. There are more variables and much less standardization in the wording of business sales agreements.

Employees
Make sure that employees hear about a potential sale of the business from you and not a third party. Rumors breed nervousness. Some of your staff may decide to seek employment elsewhere and leave immediately. If you decide to advertise the sale of your business openly, tell your employees before the advertisements run. Explain that the sale could take a long time to happen and, unless you plan to close down if no sale occurs, may not happen at all. If you expect to find a buyer who will keep all or most of your employees on the payroll, tell this to your staff. Remain truthful, but emphasize the positive. If you decide to advertise the business confidentially, make a concerted effort to avoid any leaks to employees. Consider using a business broker and have any interested buyers sign a nondisclosure agreement. Potential buyers should also visit your operation during off hours. You may also decide that one or more of your employees is the best potential buyer for your business. Employees know the business better than outsiders and may be able to persuade investors or lending institutions to help them finance a leveraged buyout

Qualifying buyers
During the course of selling a business you will get a lot of tire kickers. They won’t really be interested in buying and can waste a lot of your time. You need to be able to quickly judge the seriousness of a prospect so that the energy you put into discussing the business isn’t entirely fruitless. After all, you still need to concentrate on running your business. Seller financing One of the biggest obstacles in selling a business, especially for the price you want, is finding a buyer who has or can borrow the cash to buy the business. Hence, it is very common for businesses to be sold with seller financing. If you do decide to provide financing, have the buyer sign a loan agreement with you and be sure to get an attorney to write up the documentation. Also, don’t assume, just because you ran the business profitably, that the new owner will do so as well. Try to get as much solid collateral as you can in order to protect your loan. If your business includes real estate, motor vehicles, machinery, or other hard assets, you may want to consider selling them separately or even leasing them to the new owner. This could increase the pool of qualified prospects, increase your chances of completing a sale, and decrease the need for seller financing.