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Nearly 4 million small businesses will change hands yearly. These questions are common to many of them:
#1 - What are the major reasons for selling a business?
The reasons for selling a business vary greatly. . In fact, in the initial meeting, many prospective buyers will ask about the motivation for selling. Some commons reasons for selling include: 1) opportunity to begin a new venture; 2) burn out; 3) death; 4) divorce and 5) retirement. Whatever the reason for selling, a seller should always be ready to answer this question for the buyer.
#2 - Who is the best-qualified person to sell my business?
The person that knows your business the best is you, the owner. You have all the knowledge about your company. You know its strengths and weaknesses. You are better informed than any outsider, because you know your competition. With the help of a business intermediary to bring you good prospective buyers, and counsel from your attorney and CPA, you can be the very best person to sell your business. Remember these three important points in selling your business:
- Discretion is a must - and it is something within your control!
- Price your business properly: Too much and you will not be competitive in the market place; too little and it will scare off buyers that may think there is something wrong with your operation.
- Be prepared to talk to potential buyers and to speak intelligently about the history and nature of your business. The question is not the pure number of potential buyers – it is quality and the ability to purchase.
#3 - What do I need to know about a buyer?
You should establish the qualifications of the prospective buyer. Knowing the amount of available cash, the amount of an open credit line, what type of business, price range and their timetable are all crucial strategic ingredients. You may also want banking, business and personal references. If the buyer doesn’t have the ability to purchase, you will not want to continue any further, if the buyer is qualified, then you can proceed with a personal meeting.
#4 - What will a buyer look for in my business?
A diligent buyer will seek to substantiate and confirm every phase of your business through a thorough examination. This may include a review of your marketing and operations; product lines, services, management structure, customer market base and compatibility of operations. They will want to know how your company or business is classified. They will review your financial condition, including financial statements, tax returns, depreciation schedules, payroll records, etc. They will want to see your company's earnings for the past three to five years, as well as net worth. They will review the assets of your business - the facilities, equipment/vehicles, inventories and leasehold improvements. And they will examine your legal status and any pending or potential litigation, title or lien searches, and lease agreements. They will want to know about stock options and employment contracts. They will want to review your corporate minutes, corporate charter, patents, licenses, permits and franchise agreements. Our professionals, together with your attorney and CPA can help you with some of this information, as it is needed.
#5 - What is the purpose of a Business Profile?
The purpose of the Business Profile is to provide sufficient and accurate information to help potential buyers gain a general understanding of your business in an effort to see if there is potential interest. The Business Profile provides information to facilitate the prospective buyer's review. Information contained in the Business Profile must be accurate and complete. Mistakes or material omissions could jeopardize completion of the deal, and may also lead to litigation so your Profile needs to be accurate. Your Business Profile discloses the name of your business, its general description as to type and location, its equipment, and a summary of the business and contact information. The Business Profile is not released to potential buyers until after they sign non-disclosure agreements as confidentiality is imperative. Advertising done prior to that is "blind", meaning that there are no companies or owner names or exact locations used.
#6 - What steps will I go through in the selling process?
The time it takes to sell a business from the decision phase until the actual transaction may be a few months or a couple of years. The first step is to prepare all significant documents. Next, make initial contact and pre-screen prospective buyers. Price and terms should not be discussed until the third state where negotiations and deal structuring begin. Fourth, after all material issues have been resolved, and an agreement has been reached on price and terms, a letter of intent is often signed, and earnest money received At that point, your attorney, CPA and other professional advisors should review the purchase agreement and the closing aspects of the sale.
#7 - How should I determine the price of my business?
Determining the selling price of your business is an important step in the process of marketing your business for sale. It is a grave mistake to spend thousands of dollars fixing up a business, only to fail to adequately prepare a solid financial picture. Many small or closely held businesses show losses on their financial statements and tax returns. But, in many cases, these businesses are profitable and will sell for vastly more than their “book value”. It's important to have a professional Business Valuation prepared to show your financial picture in its best light, and get the full value you deserve. In privately held businesses, recasting of the company’s financials is imperative. Recasting may include making adjustments to the operating statements, removing owner's compensation, spousal compensation, perks, personal accounts, etc. Non-recurring expenses, or excessive interest, is removed. Other adjustments include: the pricing of fixed assets at replacement value instead of book value, making inventory adjustments when and where necessary, and substituting straight-line depreciation where it has been accelerated. A professional Business Valuation will enable you to establish the true value of your business rationally, objectively, defensibly.
#8 - What types of buyer motivations will I encounter in selling my business?
Potential buyers of businesses vary from private entrepreneurs to large publicly owned companies. The ideal buyer candidate for a business depends upon the various characteristics of the company being sold. The different types of buyers will include: individuals that want to pursue the American dream of owning their own business, employees who wish to buy out a company, families, corporations, friends, partnerships, foreign investors, owner operators and silent investors. Buyers are either synergistic or economically motivated. A synergistically motivated buyer is one who believes that the sum value of combined firms is greater that the sum of the firms separately. Through an acquisition or merger, the synergistic buyer can greatly improve their position. To the synergistic buyer, the question is how the two businesses fit together. At the other end of the spectrum is the purely economic buyer who sees the question solely as a "return on investment". Many buyers have characteristics of both the synergistic and the economic.
#9 - What forms of financing are available in the sale of my business?
Financial structuring provides the means of balancing the risk of the transaction between the buyer and seller. In general, the greater the amount of risk you are willing to assume, the greater the price the buyer will be willing to pay. In an all cash deal, the buyer assumes all the risk. At the other extreme, when the buyer has no money down, and the seller’s full payment is financed, the seller assumes all the risk.. Other methods of payment could include stock options or secured notes. Each of these alternatives has varying tax implications, which should be carefully reviewed with your financial advisor and/or tax consultant.
#10 - What tips should I know to help sell my business on my own?
Selling a business is not a simple process. It may take longer that you expect.
- Be prepared to make full disclosure of your business liabilities.
- Selling your business is a specialized process. Utilize the expertise of your attorney
and accountant.
- Before negotiations begin, know how much you want for your business and why.
- Price your company fairly.
- Be willing to remain with the business during the transition period and then as
a consultant for a reasonable amount of time.
- Stay flexible. Selling is a two-way street. A good sale is a "win/win" proposition.
- Be creative. There is a solution to most problems.
- Focus your time and energy on selling, but do not allow your business to fall apart
as a result.
- Pursue each potential buyer with fervor, and stay positive.
- Don't let negotiations drag on. Deals atrophy with age. It only takes one good buyer
to make a good deal.
- Keep your options open until you achieve your goals.
- It isn't enough to ask intelligent questions; you have to listen intelligently to
the answers. Listen to your advisors, but make your own decisions.
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