If the prospect of selling your business has motivated you to read this article, your curiosity indicates you are taking the first step toward a business exit. You don’t have to make a commitment at this point; you are just informing yourself about what is necessary to make a successful exit. This article should answer some of your questions and help you through the maze of the selling process itself.
“What is my business worth?”
This is the first question almost every seller asks. However, we’re going to put this important issue off for a bit and cover some of the things you need to know first. Before you ask how much your business is worth, you have to be ready to sell for what the market is willing to pay. If money is the only reason you want to exit your business, then you’re not really ready to make that move.
Insider Tip: It doesn’t make any difference what you think your business is worth, or what you want for it. It also doesn’t make any difference what your accountant, banker, attorney, or best friend thinks your business is worth. Only the marketplace can decide what its value is. For more on this topic, see the post “What Determines the Value of Your Business?”
This is the second question you should consider. If you are really serious and have a solid reason (or reasons) to exit the business, it will most likely happen. You can increase your chances of selling if you can answer “yes” to this follow-up question: “Do I have reasonable expectations?” An affirmative answer to these two questions means you are serious about selling.
Let’s assume you have decided to at least take the first few steps toward a business exit. Before you even think about placing your business for sale, there are some things you should do. The first thing is to gather information about the business.
Here’s a checklist of the items you should get together:
- Three years’ profit and loss statements
- Federal income tax returns for the business
- List of fixtures and equipment
- Lease and lease-related documents
- List of the loans against the business (amounts and payment schedule)
- Copies of any equipment leases
- Copy of the franchise agreement, if applicable
- Approximate amount of the inventory on hand, if applicable
- Names of any outside advisors
If you’re like many small business owners, you’ll have to search for some of these items. After you gather all of the above items, you should spend some time updating the information and filling in the blanks. You most likely have forgotten much of this information, so it’s a good idea to really take a hard look at it. Organize all of the information gathered into a neat, orderly format as if you were going to present it to a prospective purchaser. Everything begins with this information.
Make sure the financial statements of the business are current and as accurate as you can get them. If you are halfway through the current year, make sure you have last year’s figures and tax returns, and also year-to-date figures. Make all of your financial statements presentable. It will benefit you in the long run to get outside professional help, if necessary, to put the statements in order. You want to present the business well “on paper.”
As you will see later, pricing a small business is usually based on cash flow. This includes the profit of the business, but also the owner’s salary and benefits, the depreciation, and other non-cash items. So don’t panic because the bottom line isn’t what you think it should be. By the time all of the appropriate figures are added to the bottom line, the cash flow may look good.
Prospective buyers eventually want to review your financial figures. A balance sheet is not normally necessary unless the sale price of your business would be well over the $1 million figure. Buyers want to see income and expenses. They want to know if they can make the payments on the business and still make a living. Let’s face it, if your business is not making a living wage for someone, it is not likely to be sold unless you are able to find a buyer who is willing to take the risk, or an experienced industry professional who only looks for location and feels he or she can increase business.
Insider Tip: The big question is not really how much your business will sell for, but how much of it you can keep after your exit. Federal tax laws determine how much money you will actually be able to put in the bank. How your business is legally formed can be important in determining your tax status when selling your business. (For example: Is your business a corporation, partnership, or proprietorship?) Before you consider price or even selling your business, it is important that you discuss the tax implications of a sale of your business with a tax advisor. You don’t want to be in the middle of a transaction with a solid buyer and discover that the tax implications of the sale are going to net you much less than you had figured.
Assistance is Available!
If you have determined that you are serious about wanting to exit your business and that you have realistic expectations, if you understand that there are many factors which determine the value of your business and what portion of the sale price you will be able to keep, then you are ready to begin taking some of the additional steps towards a successful sale. One of the steps you may wish to consider is acquiring the expertise of a merger and acquisition advisor, like those at EastWind Business Solutions, who can explain in detail some of the issues touched on in this article, and who can also provide valuable services to help you find a serious buyer and successfully complete the sale.
Copyright: Business Brokerage Press, Inc.
Photo credit: GlobalStock (via iStock Photo)