Life brings major changes from time to time, and sometimes those changes mean it becomes time to sell a business. Many things can be cause for selling a business, but it’s important that you consider every aspect of the move and whether it’s actually in your best interests to sell.
Why Are You Selling A Business?
Before you go about listing your business for sale, it's important to think about why you are selling your business. Perhaps you are retiring from owning and running a business, so you decided to sell.
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You may have health issues that are forcing you to sell your business. Some business owners have been significantly impacted by the coronavirus pandemic. Is COVID-19 making you sell your business? Perhaps you have been shut down for so long that you don't have the financial standing to reopen.
Many other reasons could also cause you to have to sell a business. For example, major life events like divorce could require couples to sell their business and split the proceeds. On the other hand, if your spouse has died and left you their business, but you don't want it or know how to run it, you may decide to sell.
Some business owners find they can't manage the business after their partner dies, so they end up selling the whole thing instead of trying to find another partner who can help them.
Is It A Valid Reason To Sell A Business?
No matter what the reason, it's important to make sure that it's a valid reason to sell a business. That may seem like a strange statement, but you may be surprised to find out that many business owners just can't stay away from the industry their business is in.
As a result, many of them end up launching the same business again. When you do sell a business, it is customary to include a non-compete clause in the contract. Legally, that means you are barred from getting back into the industry after you have sold your business.
However, that doesn't keep some former business owners from finding a way to get back into the business they know well. They feel their skills are going to waste after they sold their business, so they find loopholes to allow them to operate in competition with the company they sold to someone else.
Some former business owners start a new company in the same industry using another person's name. Others wait exactly two years from the sale of the business because that is the typical length of a non-compete clause. Then they dive right back into the industry so they can put their skills to good use.
Is Your Business Sellable?
In some cases, you won't even be able to make your business sellable, so this is important to think about before you decide to sell a business. One example of a business that can never be sold is one that is branded in such a way that it revolves around you as the owner.
If you are the brand, then it will be impossible for you to sell your brand to someone else. On the other hand, if the brand stands on its own, then you can sell it with some planning and preparation.
If you want to sell, but you are the brand, look for ways to tweak the brand so that someone else would be able to buy it and profit from it when you are no longer part of the business.
Do You Need To Reorganize To Sell A Business?
This process may involve a reorganization of the business, like in the case of a single-member LLC that reports taxes on the business owner's personal tax return. In order for a business to be sellable, it must also be an established entity with all of its legal documentation in place, such as articles of incorporation.
You must also have all the necessary financial documentation in place. One part of determining what a company is worth is reviewing its financial statements. If you haven't been keeping good records, it will be impossible to know what the business is worth, and you will have a difficult time attracting a buyer.
The good news is that this can be fixed by getting your financial books in order for the current year. Just start with the current year, but keep in mind that the business will also be valued on its growth rate, which makes it necessary to have multiple years of financial documentation.
Separate Bank Accounts And Credit Cards
Something else to keep in mind if you want to sell a business is to make sure it has bank accounts and credit cards that are separate from your personal accounts. Whenever you sell a business, whatever is in the bank accounts and the debt that's on the credit cards are factored into the valuation.
If you haven't separated the business from your own personal accounts, then you won't be able to sell it. The good thing is that this problem can be fixed with a little bit of time. If you aren't sure how to separate the business out from your personal accounts, you might get some tips from an accountant or succession planner.
Separate Online Accounts To Sell A Business
The company's bank and credit card accounts aren't the only thing to keep in mind when it comes to separating the business from your personal information. Companies tend to have logins for social media accounts and other online accounts.
It's important to make sure all online accounts are tied to business email addresses instead of your personal email address. Once again, this is something that is fixable, but it will take some time and organization to be able to do it.
A good rule of thumb is to have a general company email address set up and then tie these online accounts to that email address. Then when someone buys the company, they can create an email address for themselves using the company website and change the email address to their email if they wish to do so.
Have A Team In Place
Another aspect of selling a business is having a team in place that can do the work when you step away. When companies are sold, the employees go with them, although the new owner can choose to change their employees after they buy the company.
This issue is related to the topic of the brand. If you are the brand, chances are that you've been doing all or most of the work yourself. You might not even have any employees to speak of. If this describes your business, then you won't be able to sell it.
Remember that not everyone who buys a company will want to do the work themselves. Many buyers will see it as an investment opportunity and a way to collect an income without having to do the work themselves.
In addition to having a team in place to do the work after you're gone, you must also make sure that you have a client database and customer relationship management in place. If you rely only on your own memory and relationships, it will be impossible to sell the business.
You could help someone else set up their business by referring customers to them, but you won't be able to collect a payment in exchange for selling a business to them.
Should You Hire A CEO Or General Manager Instead?
Before you get ready to sell a business, it's important to explore all your options. You should consider whether you could get someone to manage your business instead of selling it outright. This would enable you to keep earning dividends and payouts from the business without actually having to manage it and do the work.
If you decide to hire a CEO or general manager instead of selling the company, you should be prepared to give them equity in the business and a salary. Some managers will work without receiving equity, but they will want a higher salary then.
When deciding whether to sell a business or hire a manager or CEO for it, you should think about what kind of return you will make on your money in either situation. In most cases, the return you will get for selling a business will be less than what you can earn by continuing to hold shares in the company for a while after hiring someone else to manage it.
If it's a family business, you might consider taking a lesson from the Japanese. Due to the elderly population in the country, it's common to adopt a CEO into the family who can continue to run and grow the business while the elderly founders retire or move on.
How To Sell A Business, Step By Step
If you've taken into consideration all of the above, and you're still ready to sell a business, then here is how to go about it. The National Federation of Independent Business advises that owners think about the process in seven steps:
- Determine valuation. – Before you can sell a business, you must know what it's worth. The best way to get a good idea of what it's worth is to get a third-party valuation. This will remove your personal feelings and any nostalgia you might have for the company from the equation so you can get a fair estimate of what someone might pay for it. Fees for a third-party valuation can range from $3,000 to $7,500 in most cases. Most small businesses are worth three to six times their annual cash flow, depending on their financial health, trends in the industry they are in, demand, location and other factors.
- Clean up the financials. – Transparency is the key, so remember that any prospective buyers will be doing some thorough due diligence, which includes a review of the financials. You will probably need an accountant to work with you on getting the books together. This will help you avoid some big red flags that could prevent a sale from going through. You'll need financial statements going back at least three years before you will be able to sell the company.
- Prepare your succession plan. – Ideally, you would prepare your exit strategy before you start getting ready to sell the business. As discussed above, the key is to make sure that the company can continue operating when you step away. You should have management and a good team in place so that when the company is sold, it continues to function. A great place to start with your succession plan is to talk with employees who might be interested in buying the business from you.
- Boost sales. – A company probably won't sell if its sales are declining. Buyers want to see that there is room for the business to keep growing after they buy it. Thus, you shouldn't allow the business to slow when you are preparing to sell even though you are thinking about stepping away from it. The key is to show that the business can continue to soar after you sell it, and the only way to do that is to sell while business is booming.
- Find a broker that can sell a business. – Selling a business takes a lot of experience and work, so it isn't a bad idea to work with a broker. The broker will help you throughout the process from valuation to finding prospective buyers and then getting all the necessary contracts in place. Lawyers are good for getting contracts together, but a broker has the network necessary to find a buyer for your company. Brokers will also help with the due diligence process, which is where deals tend to fall apart if they don't go through.
- Pre-qualify buyers. – Most small business sales are paid for at least partially by third-party loans, many of which are backed by the Small Business Administration. It's important to pre-qualify prospective buyers and not get too excited when an offer is made.
- Prepare the contracts. – Finally, you will need several documents to sell a business. One of the most important documents will be the asset purchase agreement, which is a legal contract that covers the sale and purchase of assets. The document will usually be 25 to 50 pages long and include several exhibits like a non-compete agreement, asset list and other documents.