Selling a business doesn’t need to be difficult. Practically speaking, it’s just a transaction. It’s a fairly simple process of transferring one asset for another: your company for an agreed-upon amount. Of course, it’s rarely that easy. You have a large portion of your time, energy and emotion invested in your company. This connection can disrupt your thinking and make it harder to prepare for the sale. To help, I've put together a list of the eight things you should consider regarding the sale of your business before you actually enter into the process. These questions are not a definitive checklist, but hopefully they begin to prepare you for the steps you’ll need to take when you finally decide to sell.
1. Do you have an exit strategy?
The first thing you should do before putting your business on the market is to look around at the people who work for you. Would any of them want to buy your company? Selling to an employee is typically one of the easiest transitions to make because they know your business, your industry, your customers and your business partners. If that’s not possible, you’ll probably need to build in some time during and after the sale to help the new owner gain a good understanding of your infrastructure, processes and workforce.
2. Do you have a good explanation for the sale?
Potential buyers will want to know why you’re selling your business and why now. Regardless of the reason, you’ll need to have an answer. Beyond retirement, there are other reasons that are understandable to sellers, such as an unresolvable dispute between you and your business partners or family issues like an illness or death. If you don’t have a good explanation for the sale, many buyers will assume the worst: Your company has hit a plateau in growth or is even in decline. Getting top dollar for your business is the goal, and a poor perception could negatively impact the buyer’s valuation. This leads us to the third question.
3. What’s the value of your company?
Business ownership is a little like being a parent. When you’ve created something, it’s easy to focus on the best qualities and ignore the less attractive traits. Unlike parenting, however, you can hire a third party to evaluate your business objectively and provide an unbiased overview.
- Business appraisers can conduct a review of your company and provide a report for potential buyers. The cost of an overview is based on the complexity of your company and can range from $5,000 to $30,000.
- If you don’t get a third-party review, there are a few things to know before trying to value your company by yourself. First, valuations are rarely about revenue. Usually, the two main metrics are cash flow and EBITDA (earnings before interest, taxes, depreciation and amortization). In fact, if you try to grow revenue before a sale and it impacts your cash flow, it can devalue your company.
4. Are your financials in order?
The value of your company is based on financials, so you’ll want to have those as clean and transparent as possible. Work with your accountant to provide potential buyers with clean financial statements and your company’s tax returns for the previous three years at minimum. Have your year-to-date numbers available too. Most buyers will also ask for those.
5. Is your business ready for sale?
Diversify your business as much as possible leading up to its listing. When a single customer represents a large portion of your revenue, that can raise a red flag for buyers. If you have excess inventory, sell as much as possible. Paint and polish everything too. First impressions count, and potential owners want to get to work as soon as possible. Most buyers don’t want to make a purchase that requires a round of updates before they can concentrate on revenue.
6. Are your buyers pre-qualified?
Very few potential buyers will have the ability to offer you cash for your business, which means they’ll need to finance the purchase with a loan. When a lender verifies the ability of a purchaser to buy your business from the time of their initial inquiry, it can save you weeks of time spent working toward a deal with someone who ultimately doesn’t have the necessary means to enter into a contract.
7. Do you have contracts ready?
A business sale is a legal transaction, so you’re going to need an attorney who specializes in these kinds of transactions. You’ll need a purchase agreement, as well as a contract that stipulates the particulars of the purchase agreement for your physical assets and any intellectual property. Beyond those, you’ll also need to provide any contracts your business has with employees and partners. These could include any non compete agreements, nondisclosure agreements and employee agreements.
8. What happens after the purchase?
Many transactions will stipulate that you need to stay with the business for a certain amount of time to ensure a smooth transition. Depending on the industry and size of your business, this may only take a few weeks. If there’s complexity to your business or it requires a smooth transition of customers from you to the new owner, this could require a year or more.There is, of course, one other thing that happens after the purchase: You receive payment.
That’s where the team at ACCESSbank can be your partner as you settle into your new normal. Our Executive Banking Department offers the level of service you expect and deserve. As a qualifying individual, you’ll receive the one-on-one support of one of our dedicated Relationship Managers who are available to you whenever you need them. It also offers numerous complimentary banking services, as well as a suite of customized solutions created for you.
If you’re considering a business sale, let me be the first to congratulate you. Let’s connect to discuss how Executive Banking at ACCESSbank can be of service to you. Connect with me below.
Mack La Rock
Chief Banking Officer