Getting
your business ready for sale can improve pricing and reduce the time to
complete a transaction, but there are two other compelling reasons to begin
grooming your business:
·
Most of the steps
you will take are, in fact, good business practice.
·
You never know
when the opportunity for a sale might arise, either because of ill health or
injury, or because an offer comes along that is too good to pass up.
Could Your Business Be Sold Today?
To best determine whether this question can be answered right
off the bat, the following steps and questions may help you assess certain
factors buyers may consider when evaluating the worth of your business.
Assess the condition of your business as a sale prospect:
-
Do
you have the past 3 years of sales and profit history organized and properly
documented?
-
Over
the past 3 years, have sales and profits consistently increased?
-
Have
costs and operating expenses increased only at a rate consistent with
revenue
increases?
-
Do
the assets of your business exceed the liabilities of your business?
-
Is
your business able to consistently cover its costs and expenses from the
sales
revenue?
-
If
your business success is reliant on its location, is it covered by a long-term
and transferable
lease?
-
Does
your business have modern facilities and equipment?
-
Other
than yourself, does your business have a staff that customers or clients
know
and trust,
which can provide continuity after your departure?
-
Do
you have key staff members in place and secured to ensure a smooth
transition?
What is Your Business
Worth?
Whether you have determined that your business can be sold
today or are in the exit planning stage, it may prove beneficial to discover
what your business could potentially be worth by starting with a business valuation and analysis.
A business valuation involves many
variables (and many of them are subjective) that often means various “experts”
looking at the same company can formulate different recommendations. However, many small to medium- sized companies are sold for prices expressed as a
multiple of cash flow or earnings. Each industry has a “rule of thumb” and an expected multiple that buyers expect to pay. If the business’s current
financial picture doesn’t match a buyer’s expectations, one or the other has to
be adjusted.
Today’s combination of low interest rates, capital market liquidity and significant pools of private equity and debt are driving a high level of business sales and B2B acquisition activity. This can be a great opportunity for business owners. The competition for quality deals is intense, putting upward pressure on business valuations.
Define Your Motivation and Objective
One of the first questions a buyer will ask is about
motivation to sell. You need to be able to articulate your motivation; red
flags are raised if the answer seems ambiguous and unsure. This is why it’s
better to sell when times are good rather than the alternative.
· Your Motivation:
-
You’re
bored
-
You
feel burned out
-
You
want or need to move to a different geographic area
-
Personal
changes in your life
-
Your
business would benefit from increased investment and energy
-
Partner
disputes
-
Divestiture
-
Retirement
-
Other
interests
Your values can help
guide you in setting your objectives. Take some time to think these through,
perhaps discuss with your professional advisors, and come up with reasonable expectations.
·
Your Objectives:
-
Maximizing
the total value received for your business
-
Maximizing
the cash received on closing of the transaction
-
Immediately
transfer ownership and walk away from the business
-
Transition
ownership over a specified period of time (usually 3 to 12 months)
-
Define
your after-sale interests to help design a sale approach
-
Preserving
the well-being of existing employees, customers and supplier
-
Remain
with the company at the managerial helm post-closing
Get Your Books in Order
Prospective buyers will
want to see at least three years of financial statements, including balance
sheets and income statements. You will need to be able to document your
business’s true profitability by identifying nonoperational expenses.
Sellers need to quantify and substantiate these items because buyers purchasing
a business are really buying its profitability. Ideally, business records
should be separate from personal records. If your expenses are a bit tangled,
it will be greatly beneficial to separate and create a financial profile
history for just the business.
Be Sure All Legal
Commitments are in Order
Understanding permits,
leases, licenses, client and vendor contracts and how each impacts your
business is essential in the selling process. For example, if the business
location is key to its performance, a long-term lease with options at or below
fair market value would be appealing to a buyer.
Understand Tax
Implications
You will be taxed on the
profit you make from selling the business. You may be able to control the
timing through the terms of the deal, but the IRS will take its share at some
point. The amount of tax you will ultimately have to pay depends upon whether the
money you make from the sale is taxed as ordinary income or capital gains. Allocation of Sales Price Governs Tax
Consequences. There are a number of qualifications to the rules, and issues
that present planning opportunities for sellers of businesses.
·
Here are some that frequently come up:
-
Ordinary
income vs. capital gains
-
Installment
sales
-
Double
taxation of corporations
- Tax-free reorganizations
- Tax-free reorganizations
Can Your Business Be Operated by Someone Else? Some businesses cannot survive without the owners trying to do everything themselves; and they have NO key employees to help manage the operations. Even though you may have a stable of loyal customers and great reputation in your specialty, buyers may be concerned whether they themselves can replace the skills and experience of the owner. If you are absolutely vital to the business, efforts should be made to gradually delegate key responsibilities to various staff members. While not every business can be successfully operated by “any buyer”, buyers want a business that can thrive whether you’re at the helm or they are.
Polish Your Business with the Prospective Buyer in Mind: When grooming your business for sale, consider it through the
eyes of a prospective purchaser. This will help you show your business in the
best light possible. The decision to sell your business will be driven by your
personal and financial objectives. However, it’s good business sense to
recognize that life and business are unpredictable and that events and
opportunities may mean you find yourself pursuing a sale earlier than you had
planned. The investment you make in planning will be well worthwhile and give
you the peace of mind of knowing that you are able to respond to events quickly
and from a position of strength.
For more information on selling a Southwest Florida business, businesses for sale, acquisition
opportunities and business valuations; contact Florida Business Broker Dan Smith at dan@sellbusinessfl.com or 239.207.1632 for a free consultation. Visit our Corporate Investment Business Brokers website at www.floridabusinessbrokers.com or my personal website atwww.swflbiz4sale.com.
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