Maybe you started it, maybe you bought it. Either way, you've invested
a lot of yourself in the business you own. Now it's time to sell it and
move on. A business you've owned has taken your time, effort and
financial investment, and selling often is a bittersweet proposition.
The challenge is to find an effective way to sell your business in a
reasonable amount of time and on the best possible terms.
FINDING A BUYER
A person selling a business outright has a variety of ways to locate the
right buyer. Many businesses are put up for sale through classified ads
in newspapers, business journals or trade publications. Local business
associations, such as your chamber of commerce, business development
committee or economic development center, can also help get the word out
to qualified buyers. Here are a few of the other avenues you can
BUSINESS BROKERS. A business broker has a portfolio of potential
buyers, people eager to buy a successful business. Like real estate
agents, brokers are experts at bringing buyers and sellers together and
assisting in the negotiation process. They may be able to help in
locating sources of financing, too. Business brokers are paid on
commission; therefore, a high sale price is to their advantage, a factor
that works in your favor as the seller. However, a broker who is
looking for a quick sale might be inclined to undervalue your business.
Before you sign up with a broker, always ask for references from
previous customers and check with the Better Business Bureau.
COMPETITORS. If your business has gained market share at the expense of
your competitors, one or more of them might be interested in acquiring
your business, especially the customer/prospect base. To protect your
interests and ensure that your business maintains its value, potential
buyers should be approached by a third party such as a lawyer,
accountant or broker. Only when genuine interest on the part of the
competitor has been established can your company's name safely be
CUSTOMERS. A customer who purchases a product from you and then resells
it is another potential buyer. Buying your company may offer that
customer new business opportunities in an area he or she already
understands. However, if you have multiple customers who compete with
each other, you'll want to exercise extreme caution approaching one of
them. Again, consider hiring a third party to sound out interest.
VENDORS. Vendors are good prospects for much the same reason as
customers. Purchasing your business represents an expansion into a
known area with low risk. This is particularly true if you've been a
customer of theirs for some time and have an established sales record.
EMPLOYEES/PARTNERS. Some of the best prospects may be right under your
own business roof-partners and employees. If you've been running the
business with others, those people are likely candidates to take over.
Especially in small businesses, you'll find long-term employees who have
learned your business inside and out. They can be ideal buyers. They
may not be in a position to buy your business outright, but they are
likely to succeed because they understand the business. A sale like
this also causes less trauma to customers. In fact, they may not even
be aware that a change of ownership has taken place. You may even
continue to participate in the business as a consultant.
Once you decide to market your business, it's usually wise to keep your
plans confidential. If word gets out that you plan to sell, your
competitors will have a field day, and your suppliers, employees and
customers may become wary. Both situations could adversely affect your
ability to continue in business and ultimately affect your selling
WHAT'S YOUR BUSINESS WORTH?
Determining how much you should ask for your business is a complicated
process that is best done with the help of a business broker and an
accountant. Establishing the value of your business is done in
negotiations with a serious potential buyer. Factors you consider
important may not appear so to the potential buyer and vice versa. But
before you ever sit down at the negotiating table, you have a lot of
homework to do.
In preparing to sell a business, you first must gather documentation.
Audited statements prepared by a reputable accountant will help
establish your business credentials. Tax returns also offer proof of
business performance. Generally, three years of financial records will
serve to establish where the business is going and its profitability.
Among the items you'll need to gather are:
* Income statements
* Balance sheets and income tax returns from the last 3 to 5 years
* Records of accounts receivable and payable
* Copies of any notes or mortgages owed
* Existing contracts with employees, customers or suppliers
* Present lease
* Corporate books or partnership agreement
* Any patents, trademarks or copyrights
There are various methods for valuing a business, each with its
limitations. One method involves calculating net worth by subtracting
liabilities from assets. Fixed or tangible assets can include
everything from machinery and office equipment to inventory, receivables
(you may have to guarantee their collection) and prepaid expenses, such
as taxes and deposits. on the other side of the balance sheet are
liabilities, items that may reduce the selling price of your company.
They include payables such as salaries, bills and periodic expenses,
short-term bank notes and/or long-term loans, as well as federal, state
and local taxes. (In figuring payables, don't include invoices for
products or materials you use in the course of producing your own
products for resale. Those are accounted for as cost-of-goods sold.)
One key drawback to this valuation method is that it does not take into
account the profit or earning potential of the business.
Another method of valuing a business is based on its income or profits
and the return on investment that a buyer could reasonably expect.
However, since small business owners often write off everything they
legally can in order to reduce taxes, their profit margin may appear to
be smaller than it really is. It behooves you, as a seller, to prepare
an itemized profit-and-loss statement that shows what excess cash your
business generates, not simply what your final profit was for tax
Be wary of trying to set a price on your business based on simplistic
formulas or rules of thumb, or on comparisons to the amount paid for
similar businesses. Unlike home sales in a particular real estate
market, there are simply too many variables between businesses to make
truly useful comparisons for pricing purposes.
If establishing the net worth of your business is fairly
straightforward, determining the value of an entity created through your
personal efforts is more subjective. As the seller, you'll
unconsciously factor in how difficult it was in the beginning and how
much sacrifice was necessary to weather leaner times. You must realize,
however, that others will evaluate your business from a much narrower
point of view: its ability to return an investment over a fixed period
of time with an acceptable margin of risk.
This does not mean that a buyer will fail to appreciate your efforts in
building the business. But goodwill is the single most difficult
portion of your business to value. Your reputation and relationships
with your customers, vendors and the community, along with your
participation in trade-related activities, all contribute to goodwill.
In fact, your customer list is probably among your business's most
valuable assets. Sales of some businesses are based on this alone.
Accurate addresses, buying patterns and payment history all are
important information that should be available to potential buyers.
Guard this information, but be prepared to provide select references to
substantiate its credibility.
In the final analysis, your company is worth only what someone will pay
for it. Generally, a potential buyer's offer will be influenced by how
soon he or she expects to see a return on the initial investment. Five
to six years is usually considered a reasonable length of time to recoup
the initial investment. Among the other factors that will influence a
buyer's offer are the age of your business, how easy or difficult the
business is to operate and the economic climate, both locally and
nationally. Again, getting professional help in setting a price and in
negotiating the sale of your business can really pay off in the long
How the sale of your business is financed may be driven by your personal
financial needs and lifestyle. Start by deciding whether you would like
to remain involved with the business or walk away from it entirely.
This helps determine whether you will want to participate in the
financing or have the buyer obtain independent financing. The following
options illustrate the levels of financial involvement you might have in
the sale of your business.
CASH. Once a selling price is agreed upon, the buyer simply pays you
that amount. You have no involvement in the financing.
SELLER FINANCING. The buyer pays a portion of the agreed-upon selling
price at the time of sale. You provide financing for the balance. The
portion of the sale price financed by you, the seller, may be driven by
the amount of goodwill factored into the total business valuation. More
specifically, sellers often finance that portion of the selling price
represented by goodwill because it is so hard to value.
LEASE OPTION. Your third option is to offer your buyer a lease with an
option to purchase. This gives a buyer without sufficient cash or
financing resources an opportunity to participate in the business and
earn the necessary cash portion of the sale price. While the business
is being leased, you are still the owner.
Finally, to sweeten the deal for a potential buyer, you may want to
offer to serve as a consultant or sign a non-compete agreement.
Consulting is a good option if you're not determined to separate
yourself from the business. It gives the buyer the benefit of your
expertise and provides a smooth transfer of customer loyalty from the
former owner (you) to the new one. It also gives the buyer confidence
that you do not intend to compete under a new business name.
A non-compete agreement can be an added inducement to a sale, although
you should check with your attorney to find out your state's
requirements. This agreement formally assures the buyer that, for a set
period of time, you don't intend to start up all over again under a new
name and lure away customers loyal to your former company.
PASSING THE TORCH
Speak with a lawyer before selling your business to make sure you have
complied with relevant state and federal requirements. You don't want
any unpleasant surprises after the sale. If all goes smoothly, the
transfer of a business can be an exciting and rewarding time for buyer
and seller alike. You get what you want-the chance to cash out-and the
buyer gets the business opportunity he or she is seeking. Be as smart
in selling your business as you were in running it, and you're sure to
be happy with the outcome.
The U.S. gov't offers loan guaranties, publications, workshops and
counseling to small businesses through the Small Business
Administration. For info, call 1-800/827-5722
excerpted from material by the U.S. Small Business Admin.
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