Sell your small business safely and smartly with these expert tips.
Selling requires careful planning—everything from cleaning up sloppy books and tax records to dressing up a tired store and updating old operating systems—even ramping up marketing to juice sales and command a higher asking price.
In the coming decade, many independent ventures will change hands as baby boomers continue to retire in droves. And according to the online business marketplace BizBuySell, it’s a good time to sell: 1,685 small businesses sold between July and September, up from 1,189 in 2012.
If you’re considering selling your small business, consider these seven steps to stay on the offensive.
1. Determine the value of your company.
Small businesses are typically worth three to six times their annual cash flow, Lee says, depending on their overall financial health, industry trends, market demand, location and other variables. “The analysis itself relates to how risky the business is and how much growth it has in front of it,” he says.
2. Clean up your small business financials.
An owner can avoid red flags by working with an accountant to present clean financial statements and business tax returns dating back at least three years, and ensuring that all income is accounted for.
Among the no-no’s are keeping family cars and boats on the business books. And don’t be surprised if would-be buyers ask for year-to-date results, Rosen says.
On the seller’s side, even commercial landlords are getting into the due diligence game in the post-recession world, taking on the role of bankers by vetting the credit-worthiness of interested buyers before they’ll consider transferring a lease.
3. Prepare your exit strategy in advance.
Among Knox’s favorite selling strategies is one that is often overlooked: having a trusted employee take over the business. “He’s on the inside, knows all the customers, knows all the skeletons in the closet,” says Knox. If you do sell to an industry outsider, “there needs to be sufficient transition time so the new owner will feel comfortable with the industry,” he says.
4. Boost your sales.
While you’re at it, push out bloated inventories and get operating systems up to date. Retail establishments might warrant a fresh coat of paint and some new fixtures, while restaurants might update their menus and say goodbye to disagreeable staff. Overall, Cushing says to ask yourself: “What do you have to do to get your sales to increase?”
5. Find a business broker.
That’s how Jessica Fialkovich and her husband got more than $600,000—around their asking price—for the premium wine retail business they sold in 2012. “Our lawyer said he could structure the deal, but he didn’t know how to find a buyer,” says Fialkovich, who is now a business broker in Denver. “The hardest part of the business deal is going through the due diligence. That’s typically where deals fall apart and the broker provides the most value.”
6. Pre-qualify your buyers.
“Always pre-qualify your buyers,” Arora says, and “don’t get overexcited” by an offer. In most deals, Arora says, banks will also want the sellers to provide a portion of financing for the transaction; this ensures the seller has a vested interest in the venture’s ongoing success under new ownership.
And the new owner should fit into the company culture, says Bill Balderaz. Several advertising agencies approached Balderaz’s Columbus, Ohio-based digital marketing company before it closed a deal with Fathom, a much larger firm with similar expertise, in July 2011. “From the first phone call, it was clear this was the right venture to pursue,” Balderaz says of Fathom. “The trust factor was there immediately, and that’s why it worked so quickly.”
7. Get business contracts in order.
Often deals will stipulate that the prior owner remain in an advisory capacity for a set period of time to ensure a smooth transition. That’s what happened when entrepreneur Meghan Connolly Haupt sold her Oakland, Calif.-based jewelry business, Sulusso.com last year. Connolly Haupt agreed to consult with the new owner for one year. “You have to have a term of overlap where you’re helping that business, but you want to make that term as short as possible,” she says.