This article is part one of a two-part series focusing on selling your business.
A record number of small businesses continue to be sold in the United States. Fifty percent of all small business owners are over 50 years old, and it is estimated that over 70% of baby-boomer entrepreneurs will either close or sell their businesses in the next 10 years. Since millennials are looking for business opportunities, and interest rates are still relatively low, now is a good time to start strategizing about how to sell.
Selling a privately-owned business is often the single largest financial transaction in a business owner’s life. The sales process can be stressful and time-consuming. It can take anywhere from 6 months to 2 years to sell a small business.
To be successful in selling your business, you need to understand your business’s competitive position in the market, set a realistic asking price and understand a potential buyer’s suitability to pay your purchase price and operate your business.
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. In most cases, selling the business to a third party is the best way for the owner to realize his or her goals.
1. What are your financial needs?
What do you need to get out of your business when you sell it?
2. What are your lifestyle objectives?
What will you do once you sell your business?
3. 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.
4. 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, it is 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.
5. What steps can you take now make it attractive?
Consider what steps you can take to increase the value of your business, increase your customer base or enter into major contracts that last several years. How can you make your business more attractive to a potential buyer?
6. Who will buy your business?
Most potential buyers are competitors, 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. If you intend for employees or family members to continue the business, you need set the groundwork for a transition well in advance of your leaving the business.
7. 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.
8. 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. In an asset sale, the buyer picks the assets he wants to buy. Usually these are substantially all of the assets of the business. However, there may be important reasons why an entity purchase makes sense, such as to keep existing contracts, permits or licenses in place.
9. 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.
10. What are the tax consequences when you sell?
Be sure you do the necessary research to understand the tax consequences of the sale of your business.
11. What are your obligations after the sale?
Generally, sellers must provide a certain level of training to buyers to help them transition into the business. It’s in your best interest for your buyer to be 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 firstname.lastname@example.org.