Selling your small business is a big event. Learn how early planning & proactive measures can help maximize the value of your business.
It started with a dream, and after working tirelessly for thousands upon thousands of hours, you’ve created a successful (and valuable) business. As you sit back and admire what you’ve built, the thought of selling your small business crosses your mind.
Maybe it’s because you’re ready to take it easy and move into retirement, or maybe you have a new idea and want to focus your attention on that. But no matter the reason, one thing is certain: You want to prepare to sell your small business for a maximum profit.
But where do you start?
Well, just like there are many reasons to sell your business, each business owner will have a unique path for preparing for the sale. And although there is no one specific template for every business owner to follow, the information below can serve as a malleable guide that you can adjust based on your goals.
Maximize Value by Preparing in Advance
The first thing that you need to keep in mind when selling your small business is that it is not a short-term project. You will need to have well-organized finances, a clear record of profitability with projections for continued revenue, established business processes, and a defined plan for your ideal life post-sale.
You should start preparing at least two years before your target exit date, but the more time that you give yourself, the better off you will be.
There is a lot to prepare for when selling your business, but the most important consideration is your life after the sale. You will be losing a main contributor to your income after selling, so during the 2+ year preparation period, you need to develop long-term goals.
This will help you determine if you want to sell for cash, create a payment plan, or maintain an interest stake in the company.
Consulting with a financial advisor will help give you a clear picture of what you will need for financial success resulting from the sale of your business. If you already have a financial advisor, they should be the first to know about your plan to sell.
If you do not have a financial advisor, your first step is to find one with experience in small business mergers and acquisitions. They will help guide your decisions and form a long-term strategy for success.
1. Surround Yourself with Experienced Advisors
Selling a small business is a massive undertaking, and no matter what type of business you own, building a team of experienced and trusted advisors is crucial for getting the highest possible price. It may seem like an expense, but a team of specialized professionals will simplify the process, help you avoid mistakes, and give you the greatest chance of maximizing profits from the sale. It will also allow your primary focus to remain your business.
- Accountant: A certified public accountant (CPA)is indispensable throughout the sales process. They will collect tax returns and financial statements, help determine possible tax implications of the sale, and provide insight into the value of your business. You should hire a CPA as early as possible.
- Mergers & Acquisitions Attorney: A mergers & acquisitions (M&A) attorney will assist with drafting sales contracts, resolving litigation, and identifying legal issues that could affect the sale. Ideally, you should bring on an M&A attorney before any recorded communication with potential buyers begins.
- Business Broker: The business broker will be the final member of your small business advisory board. Similar to a real estate agent, they will help market your business and negotiate a deal. A successful business broker will manage due diligence and facilitate competitive bidding among buyers. They typically charge around 10% commission, but their value is usually worth the fee.
2. Organize Business Finances
Business deals often fail due to a lack of transparency in finances, so make sure to use document management best practices. Most buyers like to see at least three years’ worth of financial information before considering their purchase. If your books are in disarray, hiring a CPA will ensure that the numbers clearly and accurately reflect the profitability of your business. It is advised that your CPA follows generally accepted accounting principles (GAAP) when preparing and tracking your finances.
You should track the status and aging of your accounts receivable and payable, your sales pipeline, all your monthly expenses, and other financial documents. Ideally, you will show trending improvements in key metrics like revenue, income, and profitability. When you examine your monthly expenses, take note of those that are non-essential or not relevant to someone buying your company. Eliminating these expenses early on will allow you to sell for more of a profit.
3. Maximize Business Success to Maximize Return
Take a look at your business for possible areas for improvement. If your online presence is lacking, you could be missing out on an important source of traffic. Implementing a search engine optimization strategy is a great way improve the visibility of your small business. You also need to review what changes you can make to improve the profitability of your business and reduce expenses. These two factors will have a large influence on the value of your company.
It is also important to see where you can improve processes and efficiency. Review your insurance and other contracts for possible reductions in premiums. If it has been a while since you’ve evaluated your vendor relationships, shop around to see if there are better deals available.
4. Determine the Worth of Your Small Business
There are three general methods for valuing your small business: Asset-driven, income-based, and market comparison. Each method will provide unique insight and bring you closer to putting a dollar amount on all of your hard work.
The most widely used valuation method among small business owners is Seller’s Discretionary Earnings (SDE), which is calculated by plugging sales numbers into a formula and multiplying by an industry-specific multiplier. More information on calculating SDE can be found in this comprehensive guide to properly valuing your small business.
In addition to performing calculations for earnings, a second crucial component of valuing your business requires a thorough understanding of your business assets and their worth. These assets can be broken down into three main categories:
- Tangible: Real estate, vehicles, equipment, cash-on-hand, and inventory
- Intangible: Intellectual property, brand recognition, customer loyalty, website, and databases.
Make sure to pay special attention to the value of your real estate. If you own the building and property outright, it may be worth it to exclude the asset from the sale and establish a long-term lease with the acquiring company. Determining whether or not to include the property in the sale depends on your long-term goals, and consulting with the team you’ve assembled will help lead you in the right direction.
5. Prepare for Smooth Transition
The easier that it is for a new owner to take over operations, the more value that your business will have. If you do not already have business processes documented, begin taking notes that outline how you perform various business functions.
This will give potential owners confidence in knowing that the business can continue to run successfully without you at the helm. The more that you prepare for the transition, the more confident the buyer will be that they are purchasing a financially-sound business.
Selling Your Small Business
It’s been a long road to this point, but you’re finally ready to go through with the sale. Your accountant has organized your books. The business broker that you hired has entertained multiple buyers to find the one who will pay the most. Your M&A attorney has been hard at work finalizing contracts and performing due diligence on possible legal issues.
Your financial advisor has a plan to manage and invest the proceeds. It’s time to make sure you know all the details. Below are some questions that every business owner should ask themselves when entering into the final round of selling their business:
- How exactly will the purchaser pay for the business?
- How long does the new owner expect you to be on hand to ease the transition and help with growing pains?
- Did you work earnouts into the contract that will entitle you to additional compensation if the business hits certain financial goals?
- Are there any stipulations for your departure, including non-solicit and non-compete agreements?
Selling a business is undoubtedly an intimidating and overwhelming process. However, if you do your due diligence to evaluate the worth of your business and begin preparing for the sale well in advance, you can rest assured that your time, effort, and attention to detail will be well worth it.
By following these steps and utilizing the resources mentioned in this article, you will set yourself up to have the greatest chance of selling your small business for a big profit.
|Are you an
Entrepreneur or Startup?
Do you have a Success Story to Share?
SugerMint would like to share your success story.
We cover entrepreneur Stories, Startup News, Women entrepreneur stories, and Startup stories
Read more business articles related to Sales, Marketing, Advertising, Finance, Entrepreneurship, Management, Education, and Industry at SugerMint.