You’re ready to sell your business. You have succeeded where many have failed and taken an idea, passion or a skill and grown it from nothing to a successful business. You have dramatically beaten the odds.
For many owners their business becomes like a family member. You’ve sacrificed, spent many long hours agonizing over operational decisions and slowly built a name and a brand that is respected.
But now, for any number of reasons, you’ve decided it’s time to sell. You’re ready to move on, and to realize the benefits of all of your labor.
Not only do you want to sell your business at the best price, but you want to sell it to someone who won’t kill it. Selling a business is not like selling a house, where do you start?
A To Do List To Prepare Your Business For Sale
When getting a business ready for sale the old adage of pay me now or pay me later applies. The more you can put together before starting the sales process, the easier it will be to get through it and the quicker you can expect to close.
To Broker or not Broker what you need to know
First in many states, there is no law/regulation specifically for business brokers, they may or may not be required to have a license. Many times the state only requires they have a real estate license. Check in your state and figure out what the regulations are that govern brokers.
Fees for a broker. They are excessive, especially when you see what most brokers produce for that fee. No law or regulation governs and it is possible to negotiate the fee, but most charge 10% of the closing deal price, and can charge an additional 6% on real estate included in the deal.
Can I Go It Alone?
The answer is yes. No state has a requirement for a broker to represent you. What you pay to a broker is a significant amount and it seems that the majority will require you to do most of the work.
Like most things there are good and bad brokers. And there are more bad than good, but a good broker can make all the difference in getting the price you want and selling your business in the timeline you are looking for.
If you choose a bad broker, and there are a lot of them out there, then about all they will do is list your business. And in a lot of cases they won’t do that very well.
What to expect from your broker
You have decided that using a broker is the right way to go for you and you want to get what you are paying for. Start with this list:
- Build a list of prospective local brokers.
- Local is important because at the early meetings they will manage potential buyers and set up meetings, by phone and in person.
- Interview each one. Things to check off in interview
- Do they have experience selling businesses in your industry
- Find out exactly what they are going to provide if you give them the contract
- Are they willing to add a performance clause to their contract that allows you to fire them if they are not performing.
- What to expect from a broker
- They should have a detailed plan that will guide you through the process
- They should create the Confidential Information Memorandum known as the (CIM)
- Find out what they will include in the CIM
- What should be included in the CIM
- The Confidential information Memorandum (CIM) is the document that represents your business to prospective buyers.
- An executive summary of your business,
- Summary of how the business operates,
- a summary of the industry you operate in,
- market potential for your business.
- A financial package that includes at a minimum 3 years of P&L statements, balance sheets, equipment lists a summary that includes all add backs.
- A marketing plan for your business. What will they do to promote your business and generate interest?
- Get examples of previous work.
- Review their listings look for a focus on industry, does it match with yours?
- Provided with regular updates of activity
Broker or No Broker What You As The Seller Need To Do
Most of the items listed below will have to be done by you, regardless of if you’re using a broker or not. (If your using broker they can help and advise)
How will you sell your business?
There are basically three ways and each way requires a somewhat different approach.
- Asset sale (most common for businesses below 3m in revenue) This method evaluates the assets of the business at fair market value and sells the business based on what they are worth. In this case no liabilities transfer including any business or legal obligations. This type of transaction often happens when your business is being acquired by another business as a bolt-on. You can also see when the equipment is worth more than the business. Or by the nature of the business it may incur a lot of long term liability, that a new owner would not want to assume.
- Stock sale this method the business stays intact all business contracts remain in force, liabilities may or may not transfer, Accounts Receivable may or may not transfer. The new owner will assume all business trademarks, marketing and operations and from the outside no change will be visible. Probably this type of sale may get the highest price. This assumes that the business has management, good processes in place, and possibly long running contracts that need to remain in force.
- Liquidation this is similar to an asset sale but the sale will most likely be an auction, no part of the business remains. This type of sale is often done when a business is just not sellable for a number of reasons and the owner just wants to be done with it. Or there are debts to be paid and this is the only way to satisfy the debt. Of course this could be done by the bank as a way to satisfy a bankruptcy filing.
The Financial Package
This is where a lot of small businesses fall down, and that is with or without a broker. It is a good idea to spend the time to put together a well worked out package, with documentation that paints an accurate picture of the business as close to the present as possible.
If you are listing the business then just make plans to keep these documents updated as time moves forward while you’re waiting for the right buyer.
A lot of owners make minimal effort here, but understand that it is very much a pay me now or pay me later kind of thing. If you are selling the business and not just the equipment the potential buyer is going to need all that information and more.
Without a good financial package you are going to end up wasting time answering a lot of questions that would be in the package. You are going to look less professional and this is going to cause potential buyers to low ball you or walk away altogether without making an offer.
What is in the financial package
This is the package that is presented to potential buyers in the CIM after they have signed the NDA, and prior to the Letter of Intent. The financial package that is included in the CIM is the most important part of the document. It is what paints the financial picture and what provides the only real documentation of how the business has performed. A good financial package will improve your chances of a quick sale.
Financial documents to be included in your CIM
- Profit and Loss statements for the last three years
- Balance sheet for the last three years
- Tax returns last three years
- Pro formas for the next three years
- Customer concentrations
- Equipment list with market valuation
- Inventory value
The Executive Summary
This provides the overview of the business. It should provide enough information so that a person unfamiliar with your business can understand how it operates. This would include:
- Operational review, what makes the business work on a day to day basis
- How does the business generate revenue or sales
- What separates your business from the competition and provides its competitive position
- What marketing have you done and how has it been effective
Setting the Price
When you are setting the price of your business you need to think about a couple of things.
- How quickly do you want to sell
- What is your bottom line
- What do you want to happen to the business after you sell
All of these factors play into how to set the price for the business.
Depending on the market environment, the type of business it is, and the business performance, most businesses on average take a year to sell. Just be prepared for this timeline. It is afterall, just an average. But you have to decide what your timeline is and then set a strategy to help you get there.
Methods for Business Valuation
- Book value this simply looks at assets and subtracts liabilities and there you go that is your price.
- Asset method the value of all assets in the business and there is your price.
- Multiple of EBITDA ( is an analysis formula that stands for “earnings before interest, taxes, depreciation and amortization.” ) This method requires that you figure out what the EBITDA is for your business and multiply it by some factor. In general most businesses sell for a multiple of 2.5 – 3.5 times EBITDA. The multiple will differ based on a number of factors. These are:
- What is the industry standard your business is in
- Is your business a top performer in your industry. Do you control a large market share. Is the business run well, cost lower than competitors, higher margins than competitors. These can all lead to asking for a higher multiplier.
- You can also pay for a market valuation. If you’ve chosen to go it alone this is probably a good idea. Since you’re not paying the broker commission you can fit this into the budget. Otherwise your broker should be an indispensable part in helping you to set the price.
These 4 methods help you get to the baseline price, now you have to add in the intangible factors, like how long you want to be on the market, do you want your business to thrive after the sale and so on. All of this may cause you to raise or lower your price that you list the business at.
Make sure you take the time to determine what is your bottom line that anything below that is a walk away moment. Negotiation is part of the process and should be expected.