One of the best tools you have as a small-business owner is information. In that vein, do you know how to go about initiating the process of selling your business? We asked three experts to weigh in on how to prepare for and execute a sale.
Tony Calvacca is a Certified Business Intermediary for New York Business Brokerage, a full-service firm that assists with all aspects of the sales process including valuation, marketing, and identifying and vetting potential buyers.
John Braithwaite is the founder of FirmGains.com — a website dedicated to helping business owners prepare to sell.
Gregory R. Caruso, CPA, CVA, is a partner at Harvest Business Advisors in Columbia, Maryland — a company that has worked with small businesses for more than 15 years.
QuickBooks: What are good reasons to sell a business? What are not?
Tony Calvacca: A good reason to sell would be for a lifestyle change.
People who are not forced to sell a business are better positioned to enhance their business prior to selling by making certain that key value drivers are in place.
These value drivers can dramatically increase the value of the business. Examples include cleaning up financial statements, a well-crafted policies and procedures manual, a large and diverse customer base, and noncompete and stay agreements for key employees — contracts that create a compensation package for key employees who agree by contract to stay with the new company for some agreed-upon period of time.
Bad reasons to sell include any unplanned sale — selling a business due to sickness, partnership disputes, deterioration of the financial condition of the business, or burnout. In these cases, most businesses are not properly positioned to receive maximum value in the marketplace.
How should owners prepare for a sale?
John Braithwaite: First, ask these five questions:
- Are you ready for the stress involved in selling your business?
- Are you ready for life afterward? The change after the sale will be dramatic.
- Is your business salable? Don’t assume that it is. Ask an expert. Business owners are invariably too optimistic about the value and attractiveness of their company.
- Have you considered your staff? How will they feel about the sale? Will key members stay? Will you? Most sales involve some redundancy and possibly relocation. Are you ready for that too?
- Are you ready for two jobs? The first is the continued operation of the business; The second job is all the meetings, calls, emails, expenses and everything else that goes with selling a business. We’ve seen people go from a 40-hour to 60-hour workweek as the process progresses.
How should a business owner take on the process of valuation?
Gregory Caruso: Your accountant or CPA may be able to do it, but before selling you should have someone who regularly prepares valuations for sale situations prepare at least a calculation of value.
As part of this they should, at a minimum, review your industry information and your company’s last three to five years of financial data and any backlog or projection data you may have.
For small companies, this can be fairly straightforward, costing from $2,000 or so. For larger companies, this can become quite a complex undertaking, often costing $10,000 or more.
Calvacca: Obtain a valuation from an expert who won’t be involved in the sale of your business. Doing this helps to curb any possible bias on the part of somebody looking to represent you in the sale process.
What’s the best way to place the business on the market?
Braithwaite: Small businesses, particularly of a “standard” type of business — a real estate agency, restaurant, or similar — should not engage brokers, as their business valuation is unlikely to be influenced enough to justify the fees. But larger business owners should use a broker. Trying to sell on their own will almost certainly not achieve the right sale price for their business.
Calvacca: You or your agent should utilize multiple marketing channels, including direct mail, professional telemarketing, email blasts, internet and print ads in association journals, databases of independent business-for-sale websites, professional business brokerage associations, as well as word of mouth.
The idea is that by implementing a hyper-aggressive marketing campaign done on a confidential basis, multiple buyers can be identified and leveraged against each other to bid up the price of the business.
What should a business owner know about the due diligence process?
Calvacca: Most sellers grossly underestimate the complexity of the due diligence process. Thorough due diligence will be conducted to review many aspects of the business from finances to operations to employee and third-party contracts and agreements to intellectual property and IT setup. Depending on your industry, a buyer or the buyer’s agent will need to see copies of governmental license permits, and the like, as well as all insurances policies you hold.
You should assume that a potential buyer will leave no stone unturned.
Braithwaite: Be helpful to the buyers. If you’re too guarded or bossy, it’s a turnoff. Always be accessible, responsive, and gracious even if secretly you want to tear your hair out!
What are the most common types of selling arrangements?
Caruso: The two most common third-party sale methods are that the owner sells the business outright or the owner sells a controlling interest, often about 65 percent, and stays with the business.
Even when the owner sells the business outright there are often ongoing obligations between the buyer and seller such as the seller remaining for a transition period, which often varies from two weeks to two years.
Sometimes there are price bonuses called “earn-outs” if business results increase or penalties called “claw-backs” if the results decrease in the first year or two.
Even an outright sale often creates an ongoing relationship for one to five years.
What else should a small business owner know?
Braithwaite: Put yourself in your buyers’ shoes. Think about them — why they may be buying, what they see in your business. Shape answers and information around validating their objectives so they see your business as meeting those business aims and objectives.
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