You may have thought about selling your business right from the start but even if it never occurred to you until lately, you’re going to need a good legal roadmap to go by if you’re going to have a successful outcome.
Selling a business is both an art and a science. We’ve written out a legal roadmap for small, closely held startups, but many of these principles apply to larger transactions too.
What Makes a Business Attractive to Buyers
Many elements of a business make it attractive to potential buyers, including:
A solid history of profitability
A large and loyal customer base
A well-defined competitive advantage
Clear opportunity for growth
A desirable location
A skilled workforce
All of these elements also factor into the valuation, which we’ll go into later.
Are YOU Ready to Sell?
Of course, it’s important to be both financially and emotionally ready to sell. Business owners sometimes suffer real remorse after handing over their business to a new owner and watching that owner make changes.
The following are some helpful indicators that it may be time to sell:
You’re burned out and it just isn’t fun anymore.
You are comfortable with the current size and have no desire to invest in growth.
You feel your skills have been tapped out.
It’s not uncommon for business owners to build their business to a certain point and then realize they lack the desire, the drive, or the skills required to take it further. These are all legitimate reasons to sell.
3 Reasons Why NOW is the Right Time to Sell your Business
The following are some really excellent reasons why now is a great time to sell your business.
1. The Glut is Coming
According to the U.S. Census Bureau, one in five people in 2040 will be a senior citizen. Many smart business owners are preparing for their exit now – ahead of the glut of entrepreneurs who will be selling after 2020 to retire.
2. Interest Rates are Low
The following chart shows the history of long-term interest rates – going back to 1790! They show there has never been a better time to sell your business because there’s never been a better time for investors to borrow money and enjoy appreciable assets – like your company.
Source:Barry Ritholtz, http://www.ritholtz.com/
If your company is regularly returning a profit, now is a great time to offer it to hungry buyers looking to cash in.
3. Inflation is Low
According to analysis by the Bureau of Labor Statistics, the 10-year moving average of inflation has been 2.46% but the country’s most current inflation rate is just 1.47%. Smart investors are looking for places to park their money and earn a decent rate of return.
Savings and money markets are just not cutting it right now, so your business is looking better and better.
Decide WHAT You’re Selling and What You Want to Keep
Selling your business doesn’t have to mean selling everything. There are two ways to sell a business: through an asset purchase or an ownership purchase. Here’s the difference:
In an asset purchase, the buyer purchases some or all of your business assets but you keep the shell of the business entity and future liabilities. The assets may be tangible, such as equipment and inventory, or intangible.
In an ownership purchase, the buyer steps into your position and owns all of the company, assuming all responsibilities and liabilities.
Preparation is key to preventing surprises in the due-diligence phase of the business sale, so let’s look into how to sell your business now.
3 Steps You’ll Need to Follow to Get Ready to Sell Your Business
The steps you’ll need to follow to sell your business can take time. Most experts tell business owners to get started at least two years before they want to sell their business.
1. Determine the Value of your Business
The value of any business is much more than the hard assets you own and valuation is a tricky business. Assessing the value of experienced employees, customer and vendor lists, and other aspects of the business is less easy than a simple look at the business’ cash flow and earnings. Comparing other similar businesses may work, or you might use an industry formula. Getting a business appraisal is another way to get the right valuation.
2. Investigate the Tax Consequences
Your tax bill will be influenced by a few factors: how the business is legally set up, and whether you’re selling just the assets or the entire business ownership. Working with a qualified business lawyer can help, but you’ll also want to work with a CPA or other qualified tax expert to understand the consequences and reduce the tax bite if at all possible.
3. Spiff Up the Business for Sale
The getting ready process is similar to selling a home or a car – you’ve got to make sure things look nice on the outside and inside. Spiff up the premises, but also recast your tax-return numbers for prospective buyers. This may involve adding back to your profits discretionary expenses such as medical insurance for your family, entertainment costs, business vehicles, etc. By recasting the numbers, you’re pointing out that the buyer can choose whether to continue spending money on those items in the future.
After these steps, comes the letter of intent, due diligence, and purchase agreement phases of the sale – all of which should be handled with the help of a good business attorney.
5 Common Mistakes to Avoid when Selling your Business
Most business owners don’t go into selling their business thinking it will be easy, but many are genuinely surprised by how long it takes and how hard it can be to sell a business for a good price. The key is to not let frustration get in the way of maximizing your business sale or get tired of the effort and start making mistakes. The following are the most common mistakes made by business owners when selling their business:
Insufficiently preparing – selling a business isn’t as easy as sticking a ‘for sale’ sign in the front window. It takes adequate preparation.
Overconfidence – far too many sellers go into the process with the confidence they will be seriously rich after their business sells.
Failing to call professionals – unless you are a business-selling genius, you need the right professionals to help you. Would it be nice to cut out their fees? Sure it would, but hesitating here could cost you in the end.
Taking a hands-off approach – once you’ve got the professionals on the job, don’t disengage. No one knows your business like you do and your engagement will have a big impact on potential buyers.
- Failing to pre-qualify buyers – just like selling a home, you want to entertain only the best offers – those that are most likely to go through. Don’t skip this step.