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Selling a business

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The SmallBusiness.com WIKI Guide to Selling a business is a collaborative project created by users of the SmallBusiness.com WIKI. It provides an overview of basics related to this topic. Find more guides at The SmallBusiness.com WIKI Guides Hub.

Overview

All good things must come to an end—your career as a small business owner included. For many of you on the cusp of retiring, the key to living the easy life will be selling the business you poured your blood, sweat and tears into. Or maybe you have another business idea in mind, but you need to sell your current one before you can move on to bigger and better things. Just like with selling a house, it's important to know how and when to sell you business—and for how much. This SmallBusiness.com Guide has those answers and more.

Deciding to sell

Ideally the decision to sell is made 1-3 years before the sale is complete. A lot goes into selling a business, and to make a business appealing to buyers, it takes a lot of preparation. It's an emotional decision, as well as a financial decision, so consider these factors when deciding to sell:

  • Do you want to keep the business in the family? If you answered yes, selling the business might not be the right decision. Discuss the company's future with your family (maybe a child is eager to take over) before deciding to sell to an outside party.
  • Are you OK with giving up control of the business? If the answer is no, then selling probably shouldn't be on your radar right now. Even if you will still play a role in the business, once it's sold, you no longer have control.
  • Are you starting to feel burnout? If so, it might be time to sell. One of the worst mistakes a business owner can make is waiting too long to sell—after burnout settles in and a will to maintain or grow a business is long gone.
  • Are you close to retirement and/or need the cash flow a business sale would provide? If so, selling makes perfect sense, starting the selling process makes perfect sense.

Whatever circumstance leads you to selling, one crucial key to success is being committed to the decision to sell your business. If you're wavering back and forth between selling and not selling, that's probably a sign that you're just not ready, and could potentially send mixed messages to potential buyers.

Assembling a transition team

Getting professionals to guide you through the selling process is highly recommended. Depending on the size and field of your business, some of the professionals you may want to consult include: lawyers, accountants, business brokers, auctioneers, tax experts, bankers and the IRS. Seek referrals from satisfied customers and trusted business associates.

Including current employees and trusted individuals who are familiar with your business and industry on your transition team might also be helpful.

Valuing your business

At the end of the day, the value of your business is what a buyer is willing to pay for it, so it's your job to prove that it's worth what you're asking.

Having your business appraised is the best way to understand the true value of the business (minus the emotional dollar signs you might attach to a business you built from the ground up) and the price a potential buyer might pay. Depending on how much volume your business produces, there are low-cost (online business valuation software) to expensive ways (hiring a professional appraiser) to help you arrive at the value of your business

If you hire a business valuation expert to do the analysis for you, it's important to find someone who is unbiased (one who was not hired by the business broker you're planning to use, for example) and skilled in appraising businesses like yours (check to make sure your appraiser has experience in your industry).

Much like an IRS audit, a business appraisal requires an in-depth look at current and past financials. You'll need detailed documentation of your company's past and future performance, as well as receipts on equipment and other assets that would be a part of the sale, whether you hire an expert or do the valuation assessment yourself.

Preparing the selling memorandum

Do you have an up-to-date business plan? If so, then assembling a selling memorandum, which is essentially a guide to your business, will be easy. A selling memorandum include a brief overview of your business, including its history, products and services sold, financial highlights, upcoming opportunities, markets served and an explanation of why you're selling. It should be designed to generate interest in the business. Generally speaking, the price of the business should not be listed on this document. Price should be discussed later when you've identified a potential buyer.

Finding potential buyers

If you hire a business broker, he or she will take care of marketing and finding potential buyers. If you choose to sell the business on your own, marketing the business and finding potential buyers is on you.

Potential buyers for your business include:

  • The public: Initial public offering (IPO) and direct public offerings (DPOs)
  • Employees: Employee stock ownership plan (ESOP)
  • Another business
  • An investor group

One way you could find these buyers is to advertise the sale in newspapers or on business opportunity websites. But with this approach comes a warning: Advertising the sale before it happens might frighten current employees and scare off current clients and suppliers who sense something is wrong with the business and scared that you're trying to jump ship. While not the ideal way to let potential buyers know about your opportunity, it's best to keep the sale of the business closely guarded until it's finalized.

Don't contact just anyone as a prospect; instead make sure any prospect loosely fits the profile of someone who could be interested in your business and has the means to buy it. Then, schedule a meeting with that prospect to find out more about their ability to purchase the business, their interest in the business and what their plans are if they purchase it. Ideally, you'll meet with several prospective buyers before entertaining offers from any of them.

Entertaining offers and negotiating

Once you have a serious prospect, you can either invite them to make an offer or disclose your selling price. If both parties come close to an acceptable sales price, the next step is bringing in your trusted advisers to help you seal the deal. Your broker (if you hired one), accountant and lawyer will work with the buyer's team to nail down a legal document spelling out all of the terms of the sale.

Financing the sale of your business

With as much as 90 percent of the sales of small businesses involving at least some seller financing, it may be unrealistic to expect to receive a lump-sum payment. Yet financing can be tricky, as agreeing to a long period of payments entails the same type of risk as owning the business and depends on the business' future success. Alternatives may include getting the buyer to use non-business assets as security for the loan.

Creating the sales agreement

The sales agreement is the key document in buying the business assets or stock of a corporation. It is important to make sure the agreement is accurate and contains all the terms of the purchase. As a seller, it would be a good idea to have an attorney review this document. It is in this agreement that you should define everything that the purchase of the business entails, including assets, customer lists, intellectual property and goodwill.

Planning the transition

Employees, customers and suppliers all need to be notified once the sale terms are finalized. In many cases, the new owner of the business wants to retain former employees for a cohesive transition experience, so it may be that your current employees just need to get used to the idea of having a new boss.

A personalized letter, phone call or email to customers and suppliers announcing the sale will help quell any fears that it will be a negative experience for them. Spinning the sale in as positive light as possible is also key.

See also

External links

Sb cc 50x20.jpg Creative Commons attribution: This entry includes content from the following Business.gov source: SBA Guide to Selling a Business]