Selling Your Business - Make the Right Choices
Every entrepreneur and business owner should have an exit strategy in place from the start. This is particularly important if the business owner plans to sell the company in the future. However, often the decision to sell comes just months, or even weeks, before starting the sale process. Short-sightedness lowers profits, wastes energy and generates stress for owner, employees, creditors, vendors and other stakeholders.
Selling a business requires financial analysis, effective marketing and sales savvy. There are other factors, too. The economy may not be robust at the time you decide to sell, for instance, or your company may not appear to be an attractive purchase.
You’ve worked hard to build your company, so now is not the time to forgo business discipline. An exit strategy, like a business plan, should be in place well in advance of your departure. Simply posting a "FOR SALE" sign on the door doesn’t guarantee a successful sale.
To Sell Or Not To Sell? Other Options.
Owners enduring burnout, low cash reserves or a bad case of boredom may find selling their firms the easiest exit strategy, but other options also work. The Small Business Administration (www.sba.gov) suggests would-be sellers consider the following alternatives before starting the sale process:
- Developing a partnership
- Merging with a similar company
- Going public
- Absentee ownership
- Partial retirement
Lay The Groundwork: General Tips For A Successful Sale
Selling a company can take more than a year to complete, so once you make the decision, take steps to ensure your firm is ready for the scrutiny of potential buyers. The following guidelines make good business sense:
- Consult a financial advisor to plan your personal wealth and corporate tax strategies.
- Make a good first impression. Doing so demonstrates capable management.
- Get an advisory team in place. Enlist attorneys and accountants proficient in a full range of business matters.
- Understand your company’s profitability. Get your books in order and make sure all expenses are documented.
- Consider management succession.
- Consider using an intermediary to represent you and to help during the selling process.
- Don’t neglect business while you focus on selling. Poor business performance gives prospective buyers a reason to lower their offers.
Before The Sale: Get Organized
A company priced at fair market value, with finances in order and records complete, will sell more easily than a firm in disarray. Undertake these tasks before going public with the sale:
- Update financial and corporate records.
- Prepare statements and tax forms for the past three years, with the help of a financial advisor, if necessary.
- Resolve outstanding IRS or creditor issues.
- Assure cash flow figures are clear and separate from non-business items.
- Update all corporate records such as annual reports and employee records.
- Insure that digital records and print copies dovetail, with no holes.
- Be transparent in all reporting.
- Conduct a business valuation. Determine what your business is worth, a process that usually requires a valuation consultant. An accurate valuation is important because it allows sellers to gauge buyer offers, determine market position, and identify strengths and weaknesses and to make corrections before putting the business on the market. Methods to determine asking price include:
- Capitalization of Earnings. Valuation based on the premise that operations will continue to generate constant, regular earnings, with projected earnings multiplied by a capitalization rate to calculate the firm’s value.
- Excess Earnings. Valuation based on determining excess earnings and capitalizing the result to ascertain the value of intangible assets.
- Leveraged Cash-Flow. Valuation based on the degree to which a firm or project incurs a combination of fixed and variable costs.
A public accounting firm, valuation company, regional business broker or an investment-banking firm performs these calculations quickly and accurately. Depending on the size of your business, expect to pay $5,000 to $10,000 for valuation services.
Buyers: Know The Types
Potential business buyers fall into two broad categories :
- Industry or strategic buyers acquire companies in an allied industry because of the strategic synergies of two firms working as one. This type of buyer:
- Seeks to hold on to acquisitions and to build on existing companies.
- Acquires 100% ownership of a company.
- In the case of large corporations, may justify outbidding competition by aggressive cost cutting through layoffs and elimination of community outreach.
- Requests the current owner to stay on board for a short period of time for a smooth transition.
- Considers a dip in share price or quarterly earnings a potential obstacle to closing the sale.
- Private-equity or financial buyers buy a stake in the company with cash and, in some cases, borrowed funds. Many look for niche companies with strong managers who wish to remain on board after the sale. Buyers in this category:
- Develop clear exit plans since they often resell in a few years to realize a gain on their investment.
- Acquire only a portion of a company to align financial goals with those of the current owner, thus creating mutual incentive and value.
- Provide additional capital or access to key accounts.
- Share the seller’s vision for future growth.
- Already have on-going relationships with lenders, which can facilitate a speedy sale.
Careful planning and patience during the sale process deliver the best outcomes and enable entrepreneurs to enjoy the rewards of years of hard work.
Plan ahead to see the results you want.