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Selling Your Small Business: What You Should Know
Determining whether to start a business is a major life decision. For small business owners, deciding when and how to sell the business is arguably even more consequential. Before selling a business, the owner is likely to spend many hours and even days worrying and considering the options: Is the market right? What price should I set for my business, and is that value the “right” value? How do I get started? While these may be some of the most significant issues facing a small business owner who wants to exit, there are many factors that should be considered before putting up the proverbial for sale sign.
- The why. Thinking about selling your business—and exchanging the long hours and stress for a financial return—can be exciting. However, do you have a plan for what you will do once the business is sold? Will you retire or start a new business? Are you interested in staying on as a consultant for the new owner or even as an employee? You should reflect on your personal “why,” not only for yourself, but also because prospective buyers will want to know why you are selling. Some common reasons for selling include retirement, illness (or death), disputes among multiple owners, or a desire for a life change. Make sure you understand why you want to sell your business before you take too many steps forward. You do not want to realize too late that the one thing you are most passionate about is no longer yours.
- The when. Choosing when to sell is another major decision. Ideally, a business owner will begin to make preparations for the sale of a business as early as possible – at least a year ahead of time, but sometimes several years is appropriate. Having ample time to prepare will allow the owner to improve the business’s financial structure and internal processes. It gives the business owner more opportunity to take steps to increase the business’s attractiveness to buyers and therefore increase the sales price. In addition, every business owner should have a written business succession plan that specifies who will take over day-to-day operations in the event of certain triggering events, such as death or disability, that could happen before a business is sold.
- How much? Determining the business’s value can be very difficult. The valuation should take into account the business’s goodwill, intellectual property, cash flow, customer base, and financial statements. If you have an operating agreement in place for the business, the agreement might specify the method of calculation for the valuation or how a valuation is to be made. In either case, obtaining the assistance of a qualified business appraiser is time and money well spent. Similar to an appraiser for a residential property prior to sale, the business appraiser’s role is to establish not only the value of the business but also a detailed explanation justifying that value. The business appraisal will be used to set a sales price and provide reasoned support for the sales price to your prospective
- Involve the experts. In addition to an appraiser, you should also consider involving several other experts. First, determine whether you need a broker. A business broker charges a fee to help you sell the business and may be able to obtain a higher price for the business while saving you The broker represents you in the process of selling your business and will work with other experts, such as your lawyer and accountant. If you decide to use a broker, check references and choose one that is familiar with your industry. Even if you decide not to hire a broker, you should have a local lawyer who is familiar with sales of your type of business to ensure that all government and industry-specific regulations are followed. The lawyer will also draft all necessary legal agreements. You should also obtain help from a CPA familiar with small businesses, including their sale and valuation. The CPA can advise you about the tax implications of the sale and complete any necessary tax filings. In addition, your CPA can help with the preparations for the sale by making sure your business’s financial information is in great shape. Make sure you communicate your expectations and goals to all experts involved in the sale and stay in contact throughout the process.
- Preparation of documents. Before the sale, gather financial statements, tax returns, and all relevant legal documents, including employment agreements to help facilitate the due diligence process for a potential buyer. Make a detailed list of the inventory, customers, and any real estate or current lease agreements. You should also ensure that any potential buyer signs a nondisclosure agreement to protect your trade secrets and proprietary information. Make a detailed list of what is (and is not) being conveyed as part of the sale.
- Employees. Your employees have helped your business succeed, and it is important to consider the sale’s impact on them. Would you like to offer them job security in the event the company is sold? Will the employees with the know-how and customer relationships agree to stay on with the new owner? You should consider how to include key employees in the process and perhaps offer them stay bonus agreements to encourage them to remain with the business for a specific period of time after the sale.
- The sale. Ideally, you will receive several offers from potential buyers so you can negotiate the highest and best price for your business. The buyers will need time to review and verify your financials. You will have spent time with your experts getting your business “house” in order for the potential buyers. Now, they need to do their due diligence, so it is important to prepare to answer their questions. Involve your experts in this process. Lean on them to guide you over the finish line.
Establishing and running a successful small business is an extremely rewarding experience. Deciding to sell the business can be complicated, but if you are guided by the right experts, you can smoothly transition ownership of the small business you spent your lifetime building —and you can begin the next chapter of your life. Call Littleton Legal today at (918) 608-1836 to set up an appointment so we can discuss the first steps to making your prospective sale a reality.