Most business owners eventually have to decide when and if selling their business is the best option. Whether you are receiving buyout offers from new investors, have maxed your business potential or are ready to pursue new opportunities, knowing when and how to approach the sale of your business is the first step to getting started and ensuring a profitable transition.
What to Consider When Selling Your Business
According to Entrepreneur, the main reasons business owners decide to sell include:
- Timing/market opportunity
- To offload risk
- Personal life obligations
- Health concerns
- Industry evolving beyond your skill set
In business, as in life, timing is everything. One of the key factors in timing the sale of your business is understanding the current marketplace and where your company and services fit in. Timing impacts everything from finding the right buyer to getting the best price. According to John West, a successful entrepreneur:
“I’ve never believed you should start a company to sell it. You start a company to solve a problem and do something cool. You sell it based on how the markets are doing and how the industry is doing — you can’t plan this.”
Whether you are ready to sell your company, thinking about it or planning to hold out for the right opportunity, having a firm grasp of the current marketplace and industry trends should be your priority.
Sometimes you might sell to take advantage of a hot market and exit on top of your game; at other times, you might want to manage risk and operational losses. Regardless of your reasoning, your finances have to be organized to move ahead with a successful sale. You will need to pay off the debts you owe as well as assess your business value. Get all business financial records together to put together a true snapshot of its value.
Do You Have the Right Team in Place?
If you run a lean company, the selling process may be an easy transition depending on the buyer, the type of sale and your industry. If you operate in a heavily-regulated industry or own a large corporation, you will likely have a number of compliance issues to consider. Having the right team in place during the sale is critical for a smooth and successful transition.
How Involved Do You Want to Be?
If you are ready to make a clean break, you should experience fewer complications with a direct sell to an outside buyer than with an acquisition or takeover. Before you move to the next step, decide how involved you want to be after the sale.
Once the transaction is complete, the company’s new owners will have direct control over the company culture, management structure, operations, leadership, goals and philosophy.
Once You’ve Decided to Sell
When planning to sell your small company, research shows it takes anywhere from six to nine months to complete a sale. Depending on how prepared you are, that isn’t a lot of time. By arming yourself with the knowledge about the most important steps, you can ensure that you cover all your bases and make the smartest decision for you and your team.
Decide the When
You must decide to either sell the company in its current condition, which you can offer instantly or sell it at a later date while improving its value. To be more attractive to prospective buyers, try to offer as much value as possible. Deciding on your time frame is crucial, as this will also determine your inventory, staff and business assets.
Inform Clients and Customers
One group of people who will be particularly impacted by your decision is your clients. Clients rely on your company for services or products, and they may feel like they are left in a lurch without you. In order to minimize the impact, break the news to your clients personally. Then, explain to them that you will fulfill any contractual obligations that you still owe to them.
Being kind and thoughtful when breaking the news to clients can help soften the blow and keep your reputation as a caring, trustworthy business leader intact (which is important if you ever want to do business with them again). It can also ensure that they agree to pay you any outstanding money that is owed to you. It is also likely to be a great way to introduce them to new owners of the company if you have a buyer lined up.
Inform Your Employees
Your team will need to know that you’re planning to sell your business, and your decision is likely to have a major impact on their lives and livelihood. So, make the choice to inform them personally, with plenty of time in advance, and offer a fair and truthful explanation as to why you are choosing to sell the company.
Talk to the Experts
Before you set a price for your company, get expert assistance from those who know about the facts and figures. You can decide to make the sale yourself, handling all the documentation and preparation, or you can find a business broker to handle legal papers for you. This option might help you focus on other pending things in the meantime.
Pay Off Debts to Increase Buyer’s Interest
When selling your business, you should liquidate assets that are not pivotal to the day-to-day operations and turn them into cash. The cash will allow you to pay any debts you owe that may be an eyesore for potential buyers. This step isn’t wholly necessary but helpful to attract buyers.
Make Your Business More Attractive to Buyers
The top three things buyers will look for is your company’s financial record, its potential for growth and scalability and, lastly, its value and diversity. Each of these points must ensure them of the least possible risk involved when acquiring your company.
So for starters, ensure that there are adequate financial records and audits, and have your accounting in order and updated. Be diligent now when preparing to sell so that when the time comes, you won’t have to stress over these matters.
Next, try to see how your business might be scalable in the future, and add these prospects to your sales package. Show how much the initial investment could be worth, and make the small business as appealing as possible. Only then can you demand a higher price.
Diversify your materials, resources and operations. Are there adequate staff members on hand to handle responsibilities and management in your absence? Are there multiple suppliers the next business owners can work with? This way, you can give potential buyers peace of mind about the following steps they will take.
Outline Your Sales Package
A sales package should include all the information and materials necessary for a buyer to have a clear idea of a business’s financial prospects. Included should be management or staff contracts, pending leases and any legal issues to be aware of. Next would be the inventory of your assets, their financial worth, and condition. Remember, more information is better than too little. A buyer wants to know what they are getting into—all the benefits, as well as the downsides and pitfalls of an operation.
You Found Prospective Buyers – Now What?
Don’t lose momentum once you have found at least three potential buyers, and don’t stop at just the first offer. Many business deals fall short, so you’ll want to have a backup plan. Stay in contact with all of them and have an accountant on hand who can work out the necessary financial details.
Prepare Your Final Tax Return
Even though you no longer hold the business, you still have to file an annual tax return the year you sold your business. You must also file employment tax returns. Here is a helpful checklist from the IRS to make sure you’re covering all your tax bases.