Time to Cash Out
Considering Selling Your Business?
For majority of business owners, selling their business is a once in a lifetime event. It is often an intense, emotional, and stressful process. However, understanding of the main components of this process and realizing how these components relate to one another, significantly reduce the uncertainty and stress.
Reasons for Sale
There are many reasons why owners may decide to sell their businesses and exit. The reasons might be personal or business related.
Some of the personal reasons include:
- Willingness to retire
- Heath issues
- Family issues
- Emotional burnout
Some of the business reasons include:
- Strong increasing competition
- Operating problems
- Disagreement between partners
- Change in the business conditions and market
Decisions to Make
With the decision to sell a business, comes a list of important questions that the owner has to address. Some of these questions include:
- Financing: is the owner looking to sell the business for cash, consider providing owner’s financing to the buyer, or would offer a combination of both?
- Transition: how long would the owner be willing to stay (paid or not) after the closing to ensure a smooth transition of the business operation?
- Confidentiality: would the owner want employees, customers, suppliers, etc. to know about the fact that the business is for sale? How to ensure confidentiality in case it is necessary?
- Real Estate: what is going to happen with the building? Would the owner be willing to sell, lease, or assign the lease to the new owner?
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The Business Sale Process
A good understanding of the selling process is an extremely important factor in getting the business sold in the most efficient and least stressful way. The steps that every business sale goes through include, but not limited to the following:
- Building Business Sale Team. Every business sale process happens with the direct involvement of an accountant and an attorney. Some business owners choose to hire a business broker for multiple reasons to get a professional help in the sale process. In some cases, depending on complexity and size of the business, a certified appraiser or valuation expert has to be involved in order to provide a formal business appraisal.
- Pricing the Business. The process of business evaluation is quite complicated and involves many steps. These steps range from gathering financial information, recasting the statements, and evaluation of tangible and intangible assets to performing comparable analysis of other business sales, assessment of particular business strengths and risks, and the terms of particular sale (e.g. owner’s willingness to provide financing to the buyer, ability to be stay during the transition process, etc.).
- Preparing Selling Memorandum or Confidential Business Review. This phase requires creating a comprehensive package that would provide the potential buyers with the detailed information about the business. This might be one of the most time consuming steps since there are a lot of components to the selling memorandum such as a complete set of financial statements and ratios, physical attributes of the business, competition overview, goodwill, growth potential, asset use, market, personnel, liabilities, licenses, etc. Also, a concise one-page business summary is normally developed for a brief version of the selling memorandum.
- Developing and Running Advertising Campaign. A business owner has to analyze who the potential buyers are and decide on advertising options accordingly. In some cases, placing an ad in a local newspaper or industry magazine is enough; however, most commonly, a business for sale has to be listed in regional and/or national databases in order to receive sufficient exposure and reach qualified buyers. Finally, a business owner has to develop a pre-screen procedure for the inquiries. Answering calls or emails from prospects asking questions or requesting additional information can turn into a full time job. It is important to know how to qualify inquiries and effectively communicate with potential buyers.
- Navigating Through Negotiation Process and Structuring a Deal. The art and science of negotiations plays a critical role during this phase. The owner would have to be able to reach an agreement with the buyer on different aspects of the sale. This would result in formal purchase and sale agreement that has to be carefully structured and reviewed to make sure that all possible components and scenarios are being addressed.
- Removing Contingencies. Most common contingencies include due diligence and financing. This phase mostly requires buyers to work with their bankers, accountants, attorneys, and inspectors to make sure that the business is being represented appropriately. However, often, additional information is requested from business owners that make them still quite involved in the process.
- Closing the sale. This step includes a lot of organization and coordination. The business owner needs to coordinate the closing procedure with the buyer, attorneys, and escrow agents. Also, all the documents that are required for the business operations to get transferred to the new owner have to be prepared and reviewed. Finally, in case of seller-finance loan, all loan documents have to be drafted and evaluated.
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Advantages of Using a Business Broker
The business sale process is quite extensive and implies significant involvement and time commitment from the business owner. While many business owners manage to sell their businesses on their own, others decide to hire a business broker to get a professional assistance with the sale process.
Some of the advantages to the owner of hiring a business broker include:
- Ability to Stay Focused on the Business and Save Time. Business brokers manage the whole sale process while owners continue to do what they do best: running their businesses. As a result, owners are able to save their time and efforts, while professionals do their job recasting financial statements, creating confidential business review, advertising, qualifying the prospects, and handling negotiations.
- Maintaining Confidentiality. It is nearly impossible for business owners to sell businesses on their own while maintaining confidentiality about the sale. Business brokers act as intermediaries in business sale transaction and are able to keep confidential information from leaking to employees, customers, suppliers, etc.
- Obtaining Professional Business Evaluation. Business brokers apply their experience, market knowledge, and information gathered from several business transactions databases to perform business evaluation in the most efficient and accurate way.
- Maximizing Listing Advertising and Promotion. Qualified business brokers are normally members of several professional associations and communities that allow them not only to expand their knowledge and give them access to valuable information on past transactions, but also allow them to promote their listings on regional, national, and international levels. These business brokerage websites are well promoted and established to potential buyers, but are not allowed to accept any “for sale by owner” type of listings.
- Minimizing Unnecessary Communication with Buyers. Business brokers handle all the aspects of dealing with buyers (pre-screening, qualifying, motivating, negotiating, etc.) in order to bring the transaction to close on the most favorable terms for the owner. Business brokers bring only qualified buyers to the table and also pursue and motivate buyers without having the seller to appear eager.