This article is Part 1 of a 2 part series focusing on selling your business. You can read part 2 here.
A record number of small businesses are being sold in the United States. There are 800,000 businesses in the United States owned by Baby Boomers, and 70% of these are expected to be sold in the next 10 years.
While the sale of a privately owned business is often the single largest financial transaction in a business owner’s life, most sellers are confused about the market for their businesses and find the sales process is very stressful.
In most cases, selling the business to a third party is the best way for the owner to realize his or her goals.
It takes significant planning and preparation to successfully exit a business. Understanding the strategy behind selling your business will help you make decisions concerning your business both today and when you sell it.
You need to consider what steps you can take to increase the value of your business to a buyer. How much time and effort are you willing to invest to achieve these goals? Would you prefer to sell your business now for a discounted price?
What are your financial needs?
What do you need to get out of your business when you sell it? What are your retirement needs? What are your lifestyle objectives? What will you do once you sell your business?
What is your business worth?
Business owners frequently think their business is worth more than it really is. Have your business valued. The general economic outlook and the growth projections for your industry affect both the sales price and the time it will take to sell your business
When will you sell?
Once you understand what you need from your business, you are in a position to target the time when you will exit your business. If you have a partner, its essential to have a succession plan or buy sell agreement in place so the business or the other owners can reacquire the ownership interests if one of the owners leaves the business.
Who will buy your business?
Most potential buyers are competitors, a third parties, employees, or family members. Oftentimes a competitor knows the market and understands the business, so he may better appreciate the value of your business. He may see the acquisition of your business as an opportunity to expand and offer you the best price for it.
How will you market your business?
You will need to develop a “story” for selling your business covering the business’s financials, sales, business plan, industry projections, recent improvements and other important aspects of the business. This story may be adjusted somewhat depending on who you target as your potential buyer.
How will the transaction be structured?
Buyers generally prefer an asset purchase rather than an entity purchase, when the buyer purchases the ownership interests of the business. There may be important reasons why an entity purchase makes sense, such as to keep exiting contracts, permits or licenses in place.
How will payment be structured?
Sellers are frequently required to provide some amount of seller financing. A buyer may also insist on other financial arrangements, such as earn-outs, revenue sharing agreements and holdbacks, in an effort to make sure the business will perform at its existing level.
What are the tax consequences when you sell?
Be sure you understand the tax consequences of the sale of your business.
What are your obligations after the sale?
Generally sellers must provide a certain level of training to buyers helping them transition into the business. It’s in your best interest that your buyer is successful and will be able to pay you the sales price. It is also very common for the buyer to require that the seller agree not to compete against the business for a certain period of time.
Selling your business can be complex. Business owners should consult with their legal and tax advisers to prepare for selling a business. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or email@example.com.