5 Steps to Selling Your Business
Deciding to sell is a challenge. You have put endless hours and effort into getting to where you are today. The emotional connection to your people and company is challenging, if not impossible, to quantify and leave. Overcoming the emotional and logistical hurdles and arriving at the readiness to sell often takes years; this process is frequently rushed due to external factors such as health, age, competition, and problems with profitability. Rushing to sell your business can lead to a lower valuation, selling to a less than the ideal buyer, or not being able to find a buyer at all. Understanding your options and the process of selling your business puts you leagues ahead.
What are my options?
(1) Sell (2) Don’t sell (3) Add owner (4) Become an absentee owner
While there are other options, we are highlighting four major options and focusing on selling your business.
Selling Your Business
What is the process of selling my business?
(1) Decide the reason why you are selling your business
Buyers will ask so be prepared to answer. It is okay to be honest, unless you’re exiting because the market is shrinking or other adverse performance concerns.
(2) Timing of the Sale
Prepare for the sale of your business as early as possible. This will give you the flexibility to position your business in the best light through tightening up your expenditures, organizing and preparing financial documents, and demonstrating positive financial performance metric trends (revenue, profitability, cash flow, inventory turnover, return on assets, etc.).
Based on the aforementioned reasonings above, timing the sale of your business might not be a luxury you have. If this is your case, focus on obtaining your historic financial statements (3 to 5 years of past performance) and a customer list. Take the time to review your financial statements to see if there are any discretionary expenses or extraordinary events affecting performance. For example, you may have had some personal expenses on the books or external and abnormal events (for example - construction outside your building) caused a dip in sales.
(3) Business Valuation
Businesses who use a valuation service provider on average receive 20% more for their business. If leveraged early on, they can help portray your business in a better light, helping you show those positive financial trends and metrics buyers want to see. Additionally, their analysis will support the valuation price, providing you with justification and a secondary, partially unbiased, valuation opinion. Moreover, many valuation service providers generate marketing materials that you can use to attract buyers and support your valuation.
(4) Finding a Buyer
Who Will Buy my Business?
Competitor
Employee
Search Fund
Private Equity
Opportunistic Entrepreneur
Bequeath to my child/family member
Diversifying company
Employee (ESOP)
Vendors
Approximately 70% of buyers of small businesses are first-time buyers; the majority of these buyers are coming out of corporate America.
There are a variety of options for potential buyers, each one presents a unique set of pros and cons.; depending on your objectives one might suit you more than another. Some businesses hire a Business Broker to shepherd them through the process of selling their company and sourcing buyers. Business Brokers typically charge fees of ~15-20% of the sale price and are often only able to procure regional buyers. Not using a Business Broker can be equally as effective. Through leveraging your network, speaking with suppliers, competition, and actively reaching out you can generate a funnel of potential buyers. Once you have narrowed your prospective buyers to two to four, obtain Non-Disclosure Agreements, send out financials, and start the deal negotiation.
(5) Closing the Transaction
Letter of Intent - is a legal document that summarizes all the conditions and terms of the transactions (purchase price, due diligence terms, deposit amount, etc.) The Letter of Intent is a non-binding agreement and does not guarantee the sale will take place. Rather, it guarantees that you will not advertise your business for sale while active negotiations are being conducted with the buyer. After the Letter of Intent is signed by both you and the buyer, the buyer can use this legal document to show to lenders to secure a loan to purchase the business.
Due Diligence – is the process by the buyer reviews your business, looking at financials, operations, customer records, and generally all aspects of the business. This information will help the buyer decide whether or not they want to buy your business and if any changes need to be made to the purchase price and or terms.
The due diligence process not only provides the buyer insight into your business but also it protects you in the case the buyer decides to take legal action against you. If the buyer acknowledges in a legal document it conducted their due diligence and still sign the purchase agreement, they cannot later come back and claim they did not know certain information about your business.
Purchase Agreement – is a binding contract that obligates the buyer to purchase your business for the price and terms agreed upon in the document. It is important to hire an attorney to create and review the document. This document tends to be lengthy and outlines numerous terms. You and the buyer will want to protect yourselves from potential litigation and misunderstanding; generate and review the purchase agreement with a qualified attorney.
