The decision to sell your business is fraught with anxiety, emotion, and confusion. Attempting to sell a business is also an elaborate task including many factors and decisions, unlike anything you’ve faced before.
Among the most serious questions you face is whether you need to hire a broker, an accountant, or a lawyer, or even all three as you move through the process. The profit you receive from the sale depends on a variety of factors, including your reason for selling and timing (ie. do you want to get out fast or wait for the right offer), the current market situation (buyers pay for the net present value of your business hence a strong market for your products in a strong economy optimizes your profits), your brand’s equity, and the profitability of the business over time. Selling your business takes time and offers distractions from the normal daily operations of the business that might complicate your existing business. Then, once you sell the business, you face the very serious questions of how to best utilize profits in a manner that reduces your tax liability while providing for your future.
First things first. Once you decided to sell your business the first question is often “how can I sell my business?”. This post offers insights into how to sell your business and reach your goals from the sale. Let’s start at the beginning.
Why am I selling my business?
The decision to sell your business isn’t easy. Maybe you’ve devoted your life to the operation or maybe the business was handed down from parent to child over several generations. Selling the business sometimes feels like an admission of failure, when, in fact, selling a business is just like every other business decision you face. You must make a decision that supports your goals and fits with current market conditions. Keeping a business in a dying industry isn’t a smart idea and you can’t delay for emotional reasons.
For instance, small farmers today face a reality that isn’t in their favor. Economies of scale from major agribusinesses like Conagra as well as devastating trade policies, a pandemic, and economic factors all point to a sale as the smart option. In fact, those who faced this reality early receive the highest price for their businesses while those who lag behind may lose everything to satisfy bank loans and back taxes.
Thus, your rationale for selling as well as the time of the sale significantly impacts your profits from the sale.
A few common reasons why people sell their businesses are:
- Disputes among partners
- Feeling overworked and stressed
- Retirement
- Medical reasons
- Death
- Economic reasons
Many owners consider selling their business when it is not turning sufficient profit, which makes it difficult to lure in potential buyers, as mentioned in the example of family farms. In such cases, other factors might counteract a general business downturn when trying to sell your business such as the market situation or other strengths of your business, such as property and equipment, patents and trademarks, an innovation culture, etc.
To sell your business efficiently and maximize profit, you must highlight certain attributes of your business including the business’s history of:
- profitability
- growing its client base
- good relationships with vendors, channel partners, and other stakeholders
- developing innovative products
- a dedicated workforce
- or any of these strengths mentioned above
When Should I Sell My Business?
Remember that selling a business can take a lot of time, sometimes up to two years. You will also need some time to prepare for the sale, so if you have finalized the decision it is best to start preparations as early as possible. These preparations can include:
- Enhanced financial records
- Enhanced business structure
- Enhanced customer base
These preparations can also make the transition easier for the buyer to keep the business operations ongoing and smooth.
How Much Should I Sell My Business For?
It is important to determine the accurate worth of your business to ensure that you are not underpaid in the deal. You can get your business appraised by an independent evaluator, or you can ask your business broker to have the evaluation conducted. The evaluation will generate a detailed report with a breakdown of the market value of the business. This report will also provide plausibility to the price you have set for your business.
Should I hire a broker?
If you plan to sell your business to a family member or a trusted friend, you might not need a broker. But in other circumstances, you should consider hiring a broker. If you sell your business without a broker, you save the cost of paying a broker’s commission but lose the advantages offered by a broker.
However, hiring a broker offers a number of advantages that may outweigh the costs in terms of commissions. A broker saves time and money by allowing you to focus on running your business. In the end, if profits decline because you were focused on selling the business, the value of your sale is lower.
According to Entrepreneur, using a broker pays off in other ways. Here’s what a broker does for your business when it comes time to sell:
- Efficiently and discretely connect you with prospective buyers.
- Pre-screen prospective buyers to contain sensitive information to only the best candidates and reduce time-sucks from buyers without sufficient funds or serious interest in acquiring your business.
- Negotiate the sale to get the highest value possible. That’s where tying their commission to your selling price benefits you both.
- Handling the paperwork to ensure you’re fully protected.
How can I sell my business?
Preparing for the sale
You or your broker, with your help, prepares an information packet with the following documents for the perusal of potential buyers:
- Business reports and tax returns for the past three or four years.
- A detailed list of tools, equipment, and other assets that transfer to the new owner.
- Lists of vendors and others in your value chain.
- Current leases or agreements.
- Business operation details and manuals.
Ensure that all financial records are up-to-date and blessed by your accountant, who should answer any financial questions posed by the prospective buyer. Just like when you sell your house, get the business in the best shape possible by repairing and maintaining equipment in good working order, clear out your stockroom and your storefront, and update your manuals.
Good communication helps the sales process, as well. Ensure vendors, employees, and channel partners know of your plans to sell the business. They may even emerge as potential buyers. Keep these folks in the loop so they know what to expect at every stage in the process. Uncertainty harms your business, so ensure everyone knows what’s going on.
Set your monetary objectives early in the process of selling your business. Consult a financial advisor to understand any tax implications of the sale and ways to structure the sale to avoid taxes wherever possible. Also, discuss how to invest the proceeds. For instance, you may choose to start or purchase another business with the profits or, especially if you’re retiring, you want to invest the profits so they last through your retirement years to ensure you have the active retirement you planned. Just make sure you use a service such as TurboTax Premier, which is geared towards investment and rental property taxes.
Finding a buyer
Finding the right buyer is not only difficult, it’s a time-consuming affair. You must advertise in multiple places where prospective buyers might see your ad. For instance, trade journals offer such advertising.
Once you have two or three potential buyers, proceed with the rest of the process.
- Ensure that the potential buyers pre-qualify for sufficient funding before handing over any proprietary business data. Only turn over proprietary business data once prospective buyers sign a non-disclosure agreement with stiff penalties for breach.
- If you’re financing the deal, ensure you calculated the details correctly with an accountant or a lawyer.
- Allow room for negotiations. Buying a business isn’t like buying consumer products where the price is fixed. Buyers expect a negotiation so start with a figure a little higher than you need from the sale to give yourself some wiggle room. By the same token, set a minimum figure reflecting the number necessary to make the sale — we call this the floor.
- Ensure all agreements are in writing.
Managing the profits
Set your monetary objectives early in the process of selling your business. Consult a financial advisor to understand any tax implications of the sale and ways to structure the sale to avoid taxes wherever possible. Also, discuss how to invest the proceeds. For instance, you may choose to start or purchase another business with the profits or, especially if you’re retiring, you want to invest the profits so they last through your retirement years to ensure you have the active retirement you planned.
Selling your business is an emotional undertaking and may take a lot of your time. That’s why it’s a good idea to hire professionals who work to save you both time and money. Professionals ensure you receive a substantial profit from the sale and the exhausting process of selling your business doesn’t drain so much energy that you have nothing left for other aspects of your life.
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