Selling a Small Business: Preparing a Business for Sale Tips

One way or another, every business owner ultimately confronts the question, "What should I do with my business?"

Your Chance To Reap The Rewards

One way or another, every business owner ultimately confronts the question, “What should I do with my business?” And the question inevitably raises a host of others: Should I sell to my employees? To a competitor across town? To a larger business? Should I turn the business over to my children? Should I move on to other interests, or retain a role in the business’s future?

Like those that arise at other stages of a business career, these questions are challenging. But at this stage, emotion may make the questions especially hard to answer. Your business means a great deal more to you than a way to accumulate wealth. To build it, you invested a great deal of your time, energy and resources. it probably seems like an extension of yourself. Parting is going to be difficult.

Yet, succession is inevitable. it may happen by default, or it may happen through planning; it may reflect your decisions or, after your death, the decisions of others; it may occur at maximum value, or it may occur at a great deal less.

If it is planned for in advance and done wisely, the sale of a business may be among the most rewarding moments in a business career. You have, no doubt, recognized the need to plan your business’s future. It is never too early to consider and plan your future.

What is it worth?

No matter how good you are at running your business, you may not know its fair market value. You may know what your plant and equipment cost, and you may have a good idea of their current value, but these tangible assets are likely to comprise just a fraction of your business’s total worth. It also has intangibles, such as goodwill and “going concern” value.

Perhaps you have recently read about the sale of a “public” company in your industry. It might be tempting to try applying the same price/earnings ratio to your business to see what it would fetch. But the parallel between a private business and a public one is never exact. So, how precisely can you know your business’s true value?

There is no simple formula or rule-of-thumb for computing the value of a business. Even if two businesses have roughly equivalent cash flow, their capacity, the markets in which they operate, the competition, and numerous other factors can make all the difference in the world when it comes to value. Each enterprise must be valued as a unique entity.

The fair market value of your business is the value it would have to a prospective buyer – someone whose primary concern is its profit potential. Determining that potential is a specialized task and one that calls for the skills of a professional business appraiser. By investing in an expert appraisal, you can save yourself a great deal of time, money, and grief. Without it, you run the risk of either underestimating your business’s worth and accepting too low a price for it – or overestimating its worth – and wasting valuable time trying to reach an unrealistic goal.

There are full-service firms, as well as individuals, that specialize in business valuation, appraisal, and consultation services. The advantage of a full-service firm is that it has the resources and expertise to properly value all the various components that determine the worth of your business. it also has access to information on current appraisal and legislative requirements. Anyone using an individual appraiser should make certain that the individual is a member of the American Society of Appraisers.

A good way to find a reliable professional is to obtain referrals from people who have sold their businesses, or ask your financial adviser. You will want to retain someone who not only has access to a large database of comparable sales, but also knows how to analyze that information correctly as it may relate to your business.

An appraisal that merely cites transactions that appear to resemble yours will not prove terribly useful; it should integrate data about comparable sales with information about your business. The end result should be a comprehensive statement of your business’s worth.

An appraiser will need to examine your business’s books in detail and to review financial statements for the last five years, including balance sheets, income statements, and sources and uses of funds. in addition, the appraiser may analyze local, national, and worldwide conditions that affect the business. An appraisal from a full-service firm may include valuations of real estate, machinery, and equipment. the entire process may take anywhere from three to eight weeks.

In valuing your business, an appraiser is likely to recast past financials to determine the business’s maximum earning capacity. Owners of privately held businesses often utilize a wide range of operating styles, from aggressive to conservative, producing wide ranges in earnings. Owners and their families may have aggressive salary plans and equally aggressive retirement and benefit packages. An experienced appraiser will recast these numbers to reflect more accurately what a prospective buyer could expect the business to generate as profits.

Valuing a business is a highly customized rather than a highly standardized process. After discussions with you, your appraiser will be able to develop a thorough understanding of your business and the environment in which it operates.

Numbers will ultimately be analyzed according to well-established disciplines, but determining those numbers – formulating the assumptions for the calculations – is a matter of professional judgment. That includes judgment about the past performance, current capacity and competitive situation of your business, as well as the demographic and market trends that will affect its performance. Finally, a good appraisal should be convincing to you, as well as indicative of what a potential buyer will pay.

The value of a valuation

An accurate valuation puts you in an excellent position to negotiate a sale of your business on the most advantageous terms. It will also be critical if you intend, for example, to create an Employee Stock ownership Plan (ESOP), sell a minority in a business, execute a buy/sell agreement, or develop a plan for your estate.

In the absence of younger family members ready to assume management of your business, you may decide that your employees are your most able successors. You may be able to your business to them at a fair market price by establishing ESOP. An ESOP has several advantages for both the seller the employees. it allows for the pretax retirement of principal on the ESOP debt repayments; it may lower the cost of financing; and it may permit the deferral of capital gains tax. A valuation by an independent appraiser is one of the requirements for an ESOP.

If you are a partner in a privately held business, a valuation will be essential if you decide to sell your interest. The terms the transaction will hinge in large part on the appraised e of the business. if your business has several principals, may have entered into a buy/sell agreement. Such an agreement can contribute to an orderly succession because it for sale of a departing or deceased owner’s interest to the business or a remaining owner. A professional valuation establishes the fair market price of the business, which form the basis for the transaction price.

The assets of your business are likely to represent a significant percentage of your personal net worth. Ultimately, these assets an inheritance may result in costly estate settlement charges, including federal estate tax and state inheritance taxes.

A well-documented valuation of your business provides information that is vital for effective estate planning. You will want be certain, for example, that your estate contains enough cash to cover all anticipated expenses. If your estate lacks liquidity, your business may be subject to a forced sale on terms are less than optimal for your heirs.

Furthermore, you might want to consider a lifetime gift pro, transferring up to $10,000 worth of the business tax-free year to each heir. A valuation is important since taxable are included in the estate tax calculation at the value of gift when given; this has the effect of potentially excluding subsequent appreciation from your estate.

Of course, a valuation also provides you with information that vitally important before you begin to market your business buyers from the outside.

Marketing your business

Marketing plays as large a role in selling your business as it s in selling any other product. Inevitably, you will need to some of your own time to this effort, but you cannot to let your day-to-day management responsibilities se. Now, more than ever, your business will need to be shipshape. just as you are the expert in running your business, business broker is the expert in selling it. You are most likely achieve the results you want if you retain a professional business broker.

Business brokers may be individuals based in your local community or they may be part of full-service firms with national international reach. If you are concerned about receiving broadest possible exposure for your business, you may refer the latter.

Under the right circumstances, a MI-service firm may also be able to assist in the financing of your transaction. The need for confidentiality may also influence your choice of a business broker. If word of a possible sale reaches your employees, it may create unwarranted concerns, or even touch off defections, and leave you with a good deal less of a business to sell.

A quality business broker will perform a valuation of your business or review one that is already completed, to determine the value. The business broker will also help you decide on the best timing for your transaction, suggest the marketing plan that is most likely to fulfill your particular objectives, and help you prepare an in-depth profile of your business to show to prospective buyers. A business profile should include information in the following areas:

  • history and nature of the business
  • financial overview (five years)
  • the business’s operations
  • business’s management and employees .
  • the competitive situation
  • industry and market expectations
  • business’s strategy and projections

In addition, a business broker will help define the most viable buyers for your business in the context of your objectives.

Of course, a business broker cannot take the place of your lawyer or your accountant, any more than your lawyer or accountant can Lake the place of your business broker. All three are vital members of your team. At the very least, for example, your lawyer should review any sales contract before you sign.

The lawyer you select should be experienced in these matters, since laws change and each business sale is unique. There are also specialized issues that must be addressed as they relate to your particular needs. Such matters as price, terms, consulting agreements, employment contracts, and non-compete agreements will ultimately have to be negotiated and properly documented.

You will also want to have the best financial advice. Your accountant, who may know about your personal, as well as your business finances, should be in a good position to evaluate such a transaction from a tax perspective, and will advise you on other financial implications of the sale of your business.

So, in addition to the services of a business broker, whose job it is to help ensure that you receive good value for your business, an experienced accountant and attorney can help you maximize the amount of that value that you get to keep.

Meanwhile, you should be attending to house-keeping details that will show your business to its best advantage. These may range from sprucing up your facilities to addressing any outstanding issues that may give a prospective buyer second thoughts.

Locating a buyer

With an accurate view of the value of your business, a broker will begin to identify prospective buyers. These may include competitors, investors, employees, suppliers, customers, or people who have previously shown interest. They may be individuals, local firms, regional or national firms, or foreign-based corporations seeking to build a U.S. franchise.

An experienced business broker can help you understand the advantages and disadvantages of selling to a buyer from each of these groups, help identify current trends in the acquisition marketplace, and together with your lawyer, help address some important questions about the prospective buyers. Foreign businesses, for example, can be very active buyers and may tend to pay more than domestic buyers for the businesses they purchase. They may do so because their currency is strong relative the dollar, because they enjoy more favorable tax treatment than do American competitors, or because their confidence in the U.S. marketplace is particularly great.

Typically, a prospective buyer will want to know about your business’s past performance – its revenue and income, consistency F growth, work-force stability, and return on investment. But the future will be will be of equal, if not greater, interest. A buyer will want to know the prospects for your industry and, more specifically will want to see projections of your business’s growth potential, risk profile, working capital needs, and return on sales, equity and assets.

Of course the decision whether or not to buy your business be made in a vacuum. A prospective buyer is like your business to others than might be acquired. A prospective buyer will also compare the advantage of buying your business to the costs and benefits of building similar capabilities independently.

Structuring the transaction

Once a serious and qualified buyer has been found, your negotiations begin. Ideally, there will be more than one potential buyer. This may, of course, help you in your negotiations. Remember, money may not be the only consideration. You will want to know what the buyer can and will do for your business, your managers and employees, your customers, and most importantly, your long term plans. Having more than one interested, qualified buyer will give you a better opportunity to achieve your goal.

You and the purchaser must agree not only on a price but also on a payment structure that specifies the form and timing of your compensation. There are no hard-and-fast rules, but generally, the seller of a stable, profitable, and easily run business is likely to receive a larger part of the total price in cash. If your business is less stable, or is difficult to run, be prepared to be flexible. You may decide to receive part of the sale price over time and you may agree to adjustments in the price based on future results.

The sales contract should be designed to protect the rights of both parties. The key sections may include assets or stock to be sold, purchase price and allocations, financing arrangements, adjustments escrow, bulk sales, non-competition and/consulting arrangements, and arbitration provisions.

Finally, your future role in the business should be clearly stated in the contract. This can range from immediate severance, to transitional involvement, to a continuing position as manager consultant. Non- compete and other arrangements should also be clearly stated.

You should not anticipate instant results. On the contrary, this all takes a great deal of time and work. However, if properly planned and well executed, you will reap the rewards you have worked so hard to earn.

After the sale, you may look forward to starting or joining another business, consulting or retiring. No matter what you plan, this is a good time to consult your expert financial advisers again, to help develop a financial plan to invest the proceeds from the sale of your business.

J. Arthur Urciuoli, Senior Vice President and Director of Business Financial Services, Merrill Lynch Pierce Fenner & Smith, Inc., New York, All inquiries should be directed to Paul Conroy, Washington DC (202) 429 4651

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