Selling a business is a monumental decision, be it a small, family-owned enterprise or a sprawling corporate entity. Especially for those in the middle market and lower, how to sell a business becomes a pivotal question, as this moment often materializes just once, culminating as one of the most lucrative events of their lifetime.
If that sounds like you, you need to know exactly how to sell your business properly. There is a lot of room for mistakes, and each one can cost you hundreds of thousands, or even millions, of dollars.
Today, we’re going to walk you through each step of the business selling process and take into account the most common road bumps and decision-making opportunities sellers come across.
Let’s get started.
1: Value Determination
In this regard, selling a business is a lot like selling a house. You can’t just attach an arbitrary number to it, throw up a sign, and wait for someone to pay whatever it is you’re asking. Much like consulting M&A advisors for corporate deals, you need to know how much your business is worth compared to valid signs across the market.
When you start approaching potential buyers or advertising your business, your determined value is your starting point. Of course, several factors can make the final number go up or down, but we’ll talk about that later.
How to Determine the Value of a Business
Determining the value of a business accurately is a complex process. Rarely is the business valued as one simple round number. Instead, there are a variety of factors that have to be valued individually and added up to create a single number you can start negotiations with.
1: Performance-Related Value in the Market
At the heart of understanding how to sell a business is recognizing the pivotal role of your company’s long-term performance. Essentially, the balance between what the company earns and what it expends serves as a basic determinant of its core value.
This requires a lot of prep.
To start, you need to have 4 to 7 years of financial records and performance records organized properly to show just how much the business is making.
This includes everything that the business earns and spends. Any details that are left out can cost you potential value, or the blunder might come back later in the process and make you look dishonest.
Once you add up all your earnings and subtract your expenses, with all the paperwork to prove the legitimacy of your claimed value, you have a solid foundation to build upon.
2: Valuing Assets
Your assets also count toward the overall value of your business, and each one is worth something.
Assets include a variety of things, too.
This can include your production equipment, any IP you own, patents, the company fleet, and other things that the company owns. It’s important to value these separately because some selling methods will sell assets separately, or just the assets will be sold.
With physical assets, it’s easy to value each one. Take a company fleet, for example. Simply having a vehicle evaluator price each vehicle according to its condition and Blue Book price is all you need to do. However, assets that provide intangible value are more difficult, such as patents.
3: Projected Performance and Earnings
This is one part of your company’s value that is highly important, but it’s not easy to determine. Even if you put all your effort into determining it accurately, it’s a form of value that’s not guaranteed. That’s a risk that all buyers take when purchasing a business, though.
That’s because this is your company’s potential to earn in the future.
Once the new owner takes over, they usually want to see the company grow. Selling a business that is trending up with no signs of stopping is a lot easier than selling one that has been dropping in value for years and has a lot of obstacles in the way.
Looking at earning trends in your financial records, social and economic trends that affect your market, and similar concepts is how you can get a good idea of your company’s future potential.
However, you can’t write off a negative outlook, either. In some cases, if you can determine the issues causing negative trends and identify ways that the new company will turn that around for record profits, your business can still have value in this regard.
2: Organizing Your Records
Selling your company is a huge event for you, but it’s also a major investment for the person or entity buying it. Smart buyers do not buy a business without having all the hard data laid out in front of them with plenty of time to go over every detail.
This is for two reasons.
First, buyers want to know they’re getting a good deal, and your records will tell them whether your business is profitable and viable for the long term.
Then, there’s also the fact that they have to verify what you claim and make sure you’re not omitting information. They know what to look for.
As such, when you decide to sell a company, you have to have all the long-term records we talked about earlier organized and ready to present as soon as you start approaching buyers. It will be one of the earliest stages of the actual transaction process.
On your own, this is extremely complex. You need records going back 4 to 7 years in most situations, and you need to have documents reflecting every little aspect of your business.
It’s best to have some help from an accountant to ensure this is handled properly and that nothing is left out.
3: Boost Your Company’s Value Via Profits
You’re still not ready to approach buyers or to advertise that you’re selling. This is going to be the biggest earning event of your life, and you want to get the most out of it.
Since selling the business can take a fair amount of time, it’s a good idea to focus on boosting your company’s value as much as possible during this lull in the process.
Primarily, this is going to require you to do two things.
1: Reduce Debts and Expenses
Unveiling the optimal strategy on how to sell a business often begins with amplifying your company’s value by minimizing the liabilities and securing it down.
Debts such as loans and ineffective investments hold you back.
The easiest problem to handle is shutting down money wasters. A good example of this would be a facet of your business that just doesn’t perform well.
For a simple illustration, imagine a restaurant that offers delivery and pumps lots of money into maintaining multiple vehicles to facilitate those deliveries, but the customer base barely uses that service.
Removing it might not be optimal for a few customers, but the savings gained from dropping the service would outweigh that loss dramatically and be added to your company’s value.
Then, you have to focus on paying off debts. The new owner doesn’t want to deal with a massive loan you never paid off, and that won’t be a factor in negotiations that drive your price down.
2: Increase Profits
Beyond getting rid of money wasters, you can also focus on improving what’s already positive with your business.
Put more funds into improving brand recognition, adjusting prices to either drive higher volume sales or more profit per sale transactions, finding more cost-effective suppliers without sacrificing quality, etc.
The more the business is making, the more you can sell it.
4: Plan to Exit
There’s one last step before you actually start looking to transition out of your business. You need an exit strategy, which is a crucial part of preparing to sell your business.
This is the method you plan to use to sell the business.
You can look to sell it with a seller’s note to your employees. That’s a great way to know the business is in good hands when you leave.
However, if you plan to sell to another business owner or investor, you will need to identify who your potential buyers are and how to impress them enough to make them pull the trigger.
Knowing how you plan to sell the business, even if you’re not ready to sell it right away, helps prepare you in case your industry matures and starts losing value, you simply can’t keep up anymore due to personal reasons, or anything else happens unexpectedly.
Plus, if you do get to take a more calculated approach, you’ll already have every step of this process up to this point handled.
5: Get Help from an M&A Advisor
Everything up to this point has been fairly simplistic or achievable with cost-effective third-party services. However, as you proceed further in understanding how to sell a business, the complexities magnify, making it unwise to go in alone.
From negotiations to handling all the legal aspects of the sale, there are simply too many parts of the process that can go wrong. Especially since your buyer will likely have a professional of their own, and without experience, you can easily take a deal that’s far below what you actually deserve.
That’s where an M&A advisor comes in.
A qualified and experienced M&A advisor will guide you through the sale. You’ll still be required to be involved in the process, but your M&A advisor will make sure you’re making the right decisions throughout the complicated aspects, such as ensuring you don’t mishandle tax liability, accept deals that aren’t worth the full value of the business, or enter into an agreement that just doesn’t work on your end.
A broker can also be of use during this process. They handle the sale directly. Brokers help get you in touch with buyers, mediate or handle negotiations during the transaction, and work to close the transaction as smoothly as possible.
6: Finding Buyers
Finally, you’re at the end of the process. You just need to find a buyer that matches your exit strategy and then start the negotiation process. Assuming you have all your records organized and enlisted the help of a good broker, this part of the process should go smoothly.
Once you’re ready and your broker helps you get your business out on the market, you’ll start to be approached by potential buyers. You do not need to enter the transaction process with everyone who approaches you. That’s time-consuming and often unfruitful.
Instead, you need to pre-qualify each one before you start setting up negotiations or accepting offers.
There are three things to look for when qualifying buyers.
Whether or not the business succeeds after you sell it isn’t your problem outside of the potential emotional impact watching it fail from a distance can have.
However, a buyer who has purchased businesses in the past is far more likely to handle the rest of the process a lot more smoothly and with less chance of falling through than a brand-new buyer.
2: Time to Sell
You usually want to get through this process as quickly as possible, and if a buyer isn’t ready for months, you’re stuck waiting if you enter into the agreement.
Not only that but if you wait on the buyer for months, even without entering an agreement, you end up missing opportunities from buyers who are ready to pull the trigger now.
This is the most important factor to consider. Did the buyer source funds already, or do they have the money to buy it right now?
Not only does this play into the transaction speed factor, but buyers not having the funding before starting an agreement is the main reason deals fall apart.
Contact Final Ascent for a Start-to-Finish M&A Advisor
Understanding how to sell a business is multifaceted. It’s not just about the transaction phase. While having a competent broker is instrumental during this period, it’s equally crucial to have support both before and after.
As highlighted in our guide, the pre-sale phase is intricate, and post-sale concerns, such as tax implications and preparing for the subsequent chapter after the business exit, remain.
Final Ascent helps you from start to finish as a full-process M&A advisor. From determining the value of your business all the way to helping you plan your long-term financial future, we’re here every step of the way.
Contact us today!