Selling a Business
There are many professionals, websites and resources designed to help owners sell their business. This website is written in a user-friendly manner, designed to help you think about some key issues to help you with the selling process. You can also drop by or make an appointment with your local Community Business Development Corporation (CBDC) to talk about your succession issues. The following topics and discussions are examples of questions we regularly receive:
Do I really need a succession plan?
A succession plan is not required to sell a business. But like any major event, the process and results are usually much better when you prepare a good plan. There are things you can do in advance - say five years or more - before you sell your business to make sure you are in the best position to sell. (If you want to sell your business sooner, that's okay too, it's just easier when you've had enough time to plan properly.)
Most owners want to obtain the largest amount of "after tax" money with the minimum amount of aggravation. A well thought out plan can help you achieve this. Each succession plan is different. Regardless of differences, there are common areas a good succession plan will cover, such as:
- How will you identify a buyer?
- Will the buyer need to be trained for his/ her role?
- Are there key managers that will be affected? If so how?
- What is the current ownership structure, how will that impact the sale?
- How much is the business worth?
- What are the taxation, legal and financial considerations?
- Is there a procedure for monitoring the sales process and dealing with disputes and problems?
- What is the timetable?
- Have you thought about a contingency or backup plan?
How do I find a buyer?
To sell your business you need to find a buyer who is interested in the business and can get the financing required to make the purchase. Sometimes a family member might be interested, or it could be a competitor, an employee or a partner.
Some business owners are not comfortable advertising that their business is for sale; they have concerns about staff reactions and losing clients. This is understandable, especially in smaller communities. As a seller, however, you must realize that it is more difficult to find a buyer if people do not know your business is for sale.
If you are comfortable promoting the sale of your business, there are many avenues to sell your business, each with associated costs and challenges. Some options include free online business listings, using real estate agents/ brokers and word-of-mouth, attending CBDC events, etc.
How much is my business worth?
Your business is worth exactly what someone else is prepared to pay for it, no more and no less. There are many methods for estimating the value of a business. A couple of simple valuations can be used to help you determine an asking price.
The asset valuation method presumes the value of the entire business can be determined by looking at the value of the assets less the liabilities.
Multipliers Method of Valuation
Multipliers are another method used to estimate the value of a business. The process is to calculate an adjusted net income number and multiply it by a number, known as a multiplier, to get an estimate of worth. Multipliers are generally used in cases where a business does not have a lot of assets, such as service businesses. Multipliers can be used for any business that has an adjusted net income. A rule of thumb is that service businesses are worth between 4 and 6 times the annual net income.
The valuation methods can help you determine an asking price. Having gone through the procedure for estimating what your business is worth, you will be better able to negotiate a deal. The better you understand the underlying value of your business the better you will be at convincing potential purchasers there is real value in your business.
Sometimes owners are disappointed with the results of the valuation. We all think we are building value in our business when we work hard every day. The difficulty comes in trying to sell smaller businesses. People who want to run a small business often do not have the funds to make the purchase. Did you buy this business or did you start it yourself? Many small business owners started the business themselves. If you are going to sell this business you may have to consider assisting the purchaser with the financing.
A key point is to assure the buyers the value will still be in the business after you are no longer the owner. A buyer wants to be sure your business will continue to operate in a profitable manner when they are running it. To convince them this is the case, you need to be able to show the goodwill your business has built up over the years is not entirely personal goodwill.
I already have an interested buyer, now what?
The interested buyer usually requests financial information. Depending on your comfort level you may have the potential buyer sign a confidentiality agreement or give you a non-refundable deposit before you share too much of your private financial information. You will answer questions, show the interested buyer around your premises, and you may be asked for more documents. If the purchaser is still interested, they will proceed to the next step which is the Letter of Intent. (If they are not interested, then you will likely go through this process all over again with a new prospect.)
The Letter of Intent is not a legal document, but outlines key aspects of the deal, such as price, asset/share purchase, employment conditions, timing, a non-competition clause, etc. You can accept, reject or modify any of the terms in the letter and/or make up your own terms.
Assuming you are negotiating with the potential buyer on your own, you may feel you need more experience or knowledge to deal with the purchaser - you should consult with your advisors. You will incur professional fees whenever you talk to your lawyer or accountant, but their advice will help you avoid making any mistakes.
If you are dealing through a broker, then the broker will have been involved from the start and will continue to help you with negotiating the deal. If you use a broker you may have less need of your other advisors, but the broker will not act as your lawyer.
Once the Letter of Intent is agreed to by both sides, a formal offer (an official document drafted by lawyers) will be created by the buyer. This is when lawyers have to get involved. The Offer takes into account the terms of the deal you have negotiated. Like real estate, you may not accept the first offer. You can counter-offer and this document goes back and forth until you, the purchaser, and lawyers are satisfied.
In the offer agreement a closing date will have been set. This is the date at which you stop being the owner and the purchaser becomes the owner. The closing date is an important date as it determines a number of calculations. If the sale of your business is a share sale, then this is the date where there is a change of control. A change of control requires the corporation to file a corporate tax return. If the sale of your business is an asset sale, the closing date is the date when inventory, accounts receivable, and accounts payable will be measured. It is best to pick a month-end date for an asset sale.
This content was provided by the NS Association of CBDCs in coordination with Peverill & Associates and SBR Communications. Debi's book Selling A Business: Tax and Financial Stuff You Need To Know is available to order by calling (902) 468-1414 or by visiting www.sbrcommunications.com.