Key Concepts in Selling A Business
This is the second of three updated articles in which I describe the processes involved in buying and selling a small business. This post is from the Seller's perspective. The third post also deals with the Seller. The first post focuses on the Buyer.
1. ASSEMBLE A TEAM OF EXPERIENCED ADVISERS
Rule Number One, and perhaps the only rule, is do not attempt to sell your business by yourself. Place reasonable and prudent reliance on the expertise of others who have been through the process before. The typical participants include an accountant, attorney and tax adviser (often the attorney or accountant doubles in the role of tax adviser). Other potential team members include an investment banker, business broker, business valuation expert and other consultants, depending on the nature of the business.
2. PLAN, PLAN, PLAN.
Timing is everything in the sale of the small, privately held business. Intelligent business owners offer the business for sale as part of a carefully thought out operational and marketing plan. Potential buyers for the business are targeted years in advance. The business is put on the market at its peak valuation in a time of prosperity.
The Seller puts herself in the shoes of the Buyer and properly prepares the business for sale, getting its house in order and handling potential problems in advance of sale. Ideally, in the three to five year period preceding sale, the owner operates the business with a view to maximizing its saleability. This ordinarily requires a shift in mindset. Most privately held businesses are operated with a view to minimizing income tax liability. Demonstrating consistent profitability is generally more conducive to receiving the highest price for its sale.
3. UNDERSTAND WHY YOU ARE SELLING
It is essential to understand why you are selling the business. Typical reasons for the sale of a business include: the owner’s retirement; diminished interest in the business; disputes among owners; illness or death of one of the principals. The business may be losing money or its sales and earnings may have reached a plateau because the company lacks the working capital or management resources to grow. Each situation colors the planning and sales execution process in important ways.
4. PERSONALIZE THE DECISION TO SELL
Ask yourself questions such as: What will I do once I have sold the Company? Do I have a price in mind at which I would be willing to sell? How will my family and customers react to the sale of the Company? How do I feel about someone else running the business? What impact will new ownership have on my employees and the community it which it operates? Am I willing to offer a loan, take back paper or provide other financing to the new owner? Am I willing to continue in the employ of the new owner? Under what terms? Asking and understanding the answers to these and similar questions will have a profound effect upon successfully engaging in the sale process and closing a transaction.
5. UNDERSTAND THE BASICS
Understand that what is being sold is a business opportunity. Potential buyers look at a business with an eye to the future. Sellers are often stuck on past performance. Equally important is for the Seller to have a realistic understanding of how valuable the business actually is. Dig in and thoroughly understand why someone would want to buy your business and what would increase the value of the business in the opinion of the buyer. Consider hiring a valuation expert. All of the foregoing should be undertaken with the aim of obtaining multiple, enthusiastic potential buyers for the business.
6. DETERMINE WHETHER TO USE AN INTERMEDIARY
Another possible participant in the sale process is the business broker or investment banker. Either will ordinarily ask for a contract with a 180 day or more exclusive right to sell the business. Business brokers charge a fee usually as a percent of the purchase price. Ten percent is typical. Investment bankers usually charge lower percentage fees since the transactions they work on are larger. In exchange the intermediary often prepares a presentation package for prospective buyers. An experienced intermediary professionally markets the business and can offer assistance in pricing the business, setting the terms of sale and evaluating offers.
7. COMMIT TO THE PROCESS
Without commitment and diligence, the chances for a successful sale are minimized. Not only may the maximum sales price not be achieved, employee morale and efficiency, as well as customer and supplier relationships, may be unnecessarily disrupted. In this process, commitment equals peace of mind. Without it, the business owner faces useless distraction and stress.
