Experiencing the procedure of selling a business can be intense, particularly if you have never experienced it before. In addition to the timing of the offer and the logistics, there are loads of things to think about before you take the plunge.
It is totally alright to sell your business. Numerous independent venture holders experience difficulty with this idea, particularly if it is a business they have developed from the very beginning.
Entrepreneurs sell their companies for a wide range of reasons. If you are prepared for retirement, feeling overburdened, or just prepared to proceed onward to another part of your life, selling your business can be incredibly fulfilling.
Provided that you take the correct methodology, the returns can finance your next endeavour or give you the monetary freedom you have consistently longed for.
As somebody who has purchased and sold a few businesses all through my profession, I understand what it takes to sell your business the correct way. I have taken a muddled cycle and simplified it to just five straightforward advances.
Step #1: Determine Your Business Valuation
Most entrepreneurs are convinced that they know what their venture is worth. Unfortunately, in numerous occurrences, the figure in their minds is immensely different from the actual value. Therefore, if you don’t want to overestimate or underestimate the sale price, it would be a good idea to recruit a valuation specialist. For a fixed cost (commonly a couple thousand dollars), a competent appraiser can assess the worth of the business with a thorough report and paperwork.
The report can be of assistance in bringing trustworthiness to your asking price if potential buyers doubt the amount. At the very least, the valuation will provide you with an approximate thought of what to expect.
If you don’t want to employ an appraiser, you could always try to figure out the value on your own. In general, there are three main approaches to evaluating a business—cost approach, market approach, or the intrinsic value approach.
The third method of business evaluation is the discounted cash flow approach, which is the easiest to execute. Generally, organizations are valued between three to six times their present cash flow.
Nevertheless, there are numerous other variables to take into account, such as sector trends, business obligations, resources, and similar enterprises that are up for sale.
Whether you evaluate the worth on your own or bring in an external appraiser, the valuation might not end up being the final sale price.
At the end of the day, the business is only worth whatever amount a purchaser is willing to give. If you’re not pleased with the appraisal, it might not be the proper time to sell your venture yet.
It is similar to selling a house. Your real estate broker might tell you the worth of the house, but the building could sit on the market for months with that list price. You may have to put in some money to attain the highest value. The same analogy applies to selling your business.
Step #2: Get Your Financials in Order
After you have calculated the value of the company, it is now time to sort out your financial documents. It will be a simpler procedure for some, while it may be more complicated for others.
During the sale of a business, many individuals will be inspecting your fiscal reports. These include potential customers, lawyers, accountants, external appraisal firms, brokers, experts, and other people. To be certain that the transaction goes smoothly, you must have flawless bookkeeping.
In most scenarios, you should provide the previous three years of tax returns at least, in addition to precise financial statements (balance sheet, income statement, cash flow statement).
Any discrepancies or disarrangement in these records might be a warning for potential buyers. Discrepancies in your records might cause other doubts, even if it was just an honest oversight.
Will I be deceived? Are these figures attempting to conceal something? Can I trust all the other information I have been told regarding the business? These are the types of reflections that will be passing through the mind of the buyer.
For those who are in need of it, I would urge them to employ an accounting specialist to tidy up their accounts before they list the company for sale. This will make the process much less complicated in the future.
Step #3: Hire a Business Broker
When it comes to selling a business, there are two options to contemplate: doing it on your own or hiring a broker. If you’re selling to a person you know and trust, like a family member, then you may be able to forgo the cost of a broker. However, for most circumstances, it is advisable to enlist the help of a broker. Although there will be extra fees involved, a broker can help you get the best possible price and the process should be completed faster than if you were to do it alone. Brokers work on commission, so they will strive to get you the maximum value for your business. Furthermore, the broker will usually carry out their own evaluation of the business. When compared to the estimate you received in the initial step, these two figures may not be identical, but should be close.
If there is an enormous distinction between the stockbroker’s evaluation and the assessment given by the appraiser, it might be beneficial to seek a third opinion to find out which one is more precise.
Your broker has a lot of expertise selling companies, which is extremely useful. Other customary duties of a broker include:
Discovering the most suitable buyers
Publicizing the sale
Guaranteeing confidentiality
Enabling the transaction to be funded
Assisting with negotiations
Overseeing due diligence
Business Broker Options
Here are recommendations on the best business brokers to sell your business:
- Bizbuysell.com – best for businesses with Under $300,000
- Digitalexits.com – best for maximizing business value and sale price
- HL.com – best for businesses with over $10m in yearly profit
The pricing for a business broker is largely based on the amount of profit that your enterprise has. Generally, the more income a business brings in, the lower the brokerage fee will be. If the business has a turnover up to $1 million, the commission rate can be around 10-12%. Companies with a revenue of over $25 million usually pay a fee in the vicinity of 2.5-4.5%. Organizations with earnings somewhere in between may be subject to the Double Lehman commission structure. It is important to be aware of the broker’s commission model from the start, so don’t hesitate to ask questions if you are uncertain. A retainer fee may be charged by some brokers, but you may be able to avoid it by setting a minimum commission amount.
Step #4: Find Pre-Qualified Buyers
There are two critical terms that one must remember for this step: pre-qualified and potential customers (plural).
It is essential to consider several offers for a variety of reasons. To start off, all offers are not going to be valid. When selling a business, the owner will have to reveal confidential data about their enterprise, which could be of great value to their opponents.
It is feasible that a competitor, or someone working in the interest of a competitor, could make a proposal simply to review the financials. Thus, it is not prudent to give out that material to just anyone.
In general, a third-party loan from the SBA is used to fund business transactions. In some cases, banks may even ask the sellers to supply some of the funding as well. Thus, one should not get overly excited when the first offer arrives and assume that the sale is certain.
On average, it takes six to eight months to sell a business.
In addition to engaging a broker, you may also consider bringing in a sales expert to help hasten the process and determine which buyers are the most suitable. Generally, purchasers are divided into three primary sections: individual buyers, strategic buyers, and private equity groups. The kind of buyer who is making an offer will influence how long it takes to complete the transaction. For example, an individual buyer may require a loan from the Small Business Administration, which will take up to three months to be approved, in contrast to a private equity group that could fund the purchase through their own means. Do not leap to accept an offer immediately; you can use one offer to influence another, which will help you obtain the most value for your business.
Step #5: Finalize Legal Documents and Contracts
After you have located a suitable buyer and approved an offer, it is time to complete the transaction. This can be a confusing and tricky process, so you should have a lawyer manage most of this stage. Various legal documents that are usually associated with the sale of a business include a purchase agreement, asset listings, non-compete agreements, regulations for website use and domain name, bill of sale, and a security agreement. Though it could be possible to draw up a purchase agreement and contract on your own, it is not advisable. This is because there is the potential of omitting vital information and being exposed to unforeseen circumstances. These contracts could stretch up to 25-50+ pages. If your current lawyer is not well-versed in contract law, they could refer you to a specialist. When everything is ready, it is simply a matter of completing all the paperwork, followed by lots of signatures and initials.
Tips and Best Practices For Selling Your Business
Even though it may appear to be a straightforward process to sell a business following the five steps mentioned above, there are certain actions to take for it to go off without a hitch and to gain the highest value for it. Utilize these advice and techniques to guarantee a successful sale.
Boost Your Sales
As I already pointed out, it takes a long period of time to sell a business. You cannot be expecting to list the business one day and get a proposal the following day.
I have witnessed lots of business proprietors putting in an enormous amount of energy into selling their company, to the point where they forget about the business itself while they are still in charge. It is essential to continue to come to work and give your all in order to increase sales.
Strong sales will eventually increase the market value of the business and make it more attractive to buyers. On the contrary, a downward trend or stagnation in sales could be a significant warning sign for likely buyers.
For that reason, it is important for you to be surrounded by people who can assist you through this process. Let your broker, lawyer, and accountant take care of their respective tasks. This will give you more time to focus on sales.
Develop an Exit Strategy
It’s essential for any entrepreneur to have a plan for leaving their business. The most effective exit strategies are established far in advance of actually making the decision to put the company up for sale.
So, ideally, it’s something you’ve been working on for a while; creating a suitable exit strategy takes lots of effort. For those who don’t have a plan in place yet, it’s not too late to make one. However, this might not be the ideal time to get rid of your business.
It’s not preferable to have to sell your business due to necessity. In this type of situation, the chances are slim that you will be able to sell it for its maximum worth.
It is always wise to prepare for the worst-case scenarios. Make sure you have a backup plan in the event that a large retail outlet appears near your business. Consider what you would do if you or someone you work with becomes ill, or if your children choose not to take over the company. These are only a few of the issues you could face. Being prepared with an exit strategy when the time comes to sell will ensure that you are ready for anything.
Be Rational
Parting with a business can be extremely draining. This is especially accurate when it is a family business, a small business, or something you built yourself from the beginning.
Most business owners have a great sense of pride for what they have achieved. Much effort, anxiety, sleepless nights are among the many things that entrepreneurs share.
Having said that, it is crucial that you keep your emotions out of the deal. Having your emotions take over can distort your views and decisions.
Potential buyers don’t care about the amount of time you’ve dedicated to the business for the past decade. All they are concerned about is the result. If you believe an offer is too low or unjust, you have the option to decline.
In some circumstances, a competitor may make a fair and legitimate offer, with the intention of buying. Don’t let an existing feud stop the deal from going through.
Get Paid Up Front
It is essential that the terms of your agreement involve an initial payment. Many customers may come up with a great offer, but they may not have the funds to pay you right away.
Delayed payment might not seem like a significant issue, however, this kind of arrangement could cause some problems for you in the future. You could find yourself in a situation where you are not being compensated based on the terms that you accepted. If that occurs, then taking legal action would just be an additional cost for you.
Furthermore, the new owner could run out of money to keep the business operating. If that happens, there may not be any money left for you if the company goes bankrupt.
Let’s assume you have two serious offers on the table. One is for a higher amount but it involves a ten-year financing term. The second offer is lower but provides you with an upfront payment. I would highly suggest the latter.
FAQS ON SELLING A BUSINESS
- What is the worth of my business?
The market determines the cost of a company and it is the purchaser who sets the price. Generally speaking, a business is valued based on a multiple of its earnings, meaning the value is pegged to the profit of the organization.
2. What is the process of pricing a business for sale?
The cost of a business is dependent on the amount of money it earns. If it is not making money, the price is based on the worth of the assets. If it makes some money, the value is based on the seller’s discretionary income. In the event that it generates a significant amount of money, the price is a multiple of EBIDTA.
3. How long does it take for a company to be sold?
The length of time it takes to sell a business typically depends on the size of the deal. At Business Exits, the typical closing period for a deal is about 7 months.
4. If you’re looking to offload your business in a hurry, the key is to make sure it’s priced correctly and that the terms are favorable. A good way to expedite the process is to offer the business without a down payment but with an earnout based on performance. This could be an attractive option for a business partner, employee, competitor, or someone in your network.
5. When it comes to what type of business is the most marketable, any and all industries can show promise. But certain industries, like services, logistics and transportation, property management, home services, and tech, tend to bring higher valuations.
6. When selecting a broker to handle the sale, it depends on the size of the deal. If the company is small (under $1 million in revenue), then a service like bizbuysell.com might be the best fit. For larger companies (between $1 million and $25 million in revenue), businessexits.com specializes in that range.
We went through the prior five years’ worth of sales numbers, which totaled 14,117 trades between $50K and $100M. As you can observe from the graph, we drew out a few fundamental insights: the normal multiple of profit sold was 2.59 times profit, the typical sales cost was $595,000, and 90% of the deals were valued below $5M in sales price. The term “multiple” is often used. It can be used to determine how much a business will be worth at the time of sale by applying it to several financial metrics in the business (such as EBITDA, net earnings, gross revenue, etc.). We determine the multiple for a business based on profit through SDE (seller’s discretionary earnings).
Conclusion
Preparing to dispose of your enterprise? Attempt not to make things excessively confused; the whole cycle can be separated into just five basic steps. Having expressed that, offering a business requires some investment. Have sensible desires regarding the cost and time span. In certain cases, you may at last choose to defer the deal until you can build incomes and sort out your monetary records. On the off chance that your organization is doing admirably and producing high benefits, it is significantly more attractive to potential purchasers. This guide should assist you with navigating the process. Make certain to adhere to the tips and best practices that I have laid out above to get the most extreme procurement worth for your organization.