What To Expect When You Sell Your Business

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What To Expect When You Sell Your Business

 

Edward L. Fixen, President

BusinessQuest

 

The process of selling a business is a very complicated, long and emotional experience filled with uncertainty that few business owners are fully prepared for in advance.  This article attempts to identify some of the key issues that an owner should be aware of in advance of making the decision to sell their business.

 

Business Value – Many business owners believe they know what their business is worth and have a strong tendency to overestimate the fair market value of their business.  Often this information is based on the sell of another business or competitor.  Unlike real estate, the sale of a similar business in the same industry is unlikely to provide a meaningful indication of the value of your business.  Rules of thumbs for business valuation purposes are usually misleading and have very limited use when it comes time to value your business for sale on the market.

 

The value of a business is dependent on many factors that will be unique to each business.  The most critical valuation factors include historical revenue and earnings, age of the business, stability of revenue and earnings, financial strength of the company, depth of management and key employees, customer base and concentration, sustainability of revenue and earnings, growth opportunities, reason for sale of business, industry competition and condition of physical assets/equipment.  With all these variables involved in the value of a business, it is evident that each business must be evaluated on its individual merits.

 

An independent business valuation specific to your business is the best approach to get an objective estimate of the value of your business.

 

Time To Sell – Most owners drastically underestimate the time it will take to complete the sale of their business.  The time it takes to sell a business depends largely on the asking price relative to market value, quality of financial records and prevailing economic conditions.  For small businesses with sales under $1 million, the average time to sell a business is in excess of six months.  As business size increases, so too does the average time to sell.  It is not uncommon for businesses with asking prices of $1 million or more to take one to two years to complete the sale.

 

It is advisable to begin preparing for the sale of your business several years in advance to help your business sell at the best price possible and in a timely fashion.  It is also advisable to put your business on the market at least one year before you are ready to sell.  It is not uncommon that the seller is requested to stay on as a consultant or employee for a period of up to one year after the sale of the business.

 

Terms Of The Sale – You’ve heard the expression, “You name the price, I name the terms.”  Well, it has become customary that buyers will expect a seller to finance a portion of the sale price.  The degree of “seller financing” varies but has become commonplace as a means of structuring a deal.  Seller financing is a means by which a buyer can determine a seller’s confidence in the ability of the business to produce adequate earnings to repay the debt.  Even larger deals involving SBA loans or private equity financing often involve some degree of seller financing.

 

Seller financing does have the benefit of reducing capital gains tax at the time of the sale but obviously carries the risk of default by the buyer.  The risk of default can be mitigated by collateralizing the assets of the business against the note and obtaining a personal guarantee from the buyer.

 

A seller should be prepared to finance a portion of the overall asking price or expect to receive less than fair market value.

 

Good Books & Records – Any buyer will perform a thorough due diligence review of all aspects of the business including financial records before completing a business acquisition.  The quality and accuracy of books and records are critical to gaining the confidence of a buyer and getting your price.  All too often this seemingly obvious fact is overlooked and adversely affects the selling process.  It is a good idea when possible to put good accounting practices in place well in advance of selling and having at least three years of high quality books and records before putting your business on the market.

 

Business Distraction – Although it is the business broker’s job to minimize distractions to the owner, you will need to be prepared for the distractions and demands that will inevitably occur during the due diligence process after reaching an agreement with a buyer.  The buyer will need to gather and perform a detailed analysis of all your financial records such as income statements, balance sheets, tax returns, bank statements, accounts receivables, accounts payables, inventory reports, etc.  Additionally, you will need to have a plan in place of how you will deal with employees during due diligence when the buyer is spending a lot of time at your place of business but has not yet taken possession of the business.

 

Contract Negotiation – When it comes time for negotiation of the final purchase agreement and closing, you will need to be prepared for several negotiating roadblocks that will require a fair and open-minded approach to resolving with the buyer.  The purchase and sell of a business inherently involves uncertainty and risk for both parties.  The role of your legal advisor will be to act as your advocate and minimize your risk without regard to the buyer’s risk.  At some point, the buyer and seller have to decide for themselves what an acceptable level of risk is and work through the legal ease accordingly.  It is said that “a deal dies a thousand deaths” because inevitably, numerous contractual stalemates arise between the buyer and seller that must be overcome before a final agreement is reached.

 

If you prepare for the sale of your business in advance, sell when you don’t have to sell and keep these issues in mind, you will increase the likelihood of successfully selling your business.

 

Author: Mr. Fixen is Accredited by the Institute of Business Appraisers (AIBA) and a Certified Business Broker.  Mr. Fixen is the President of BusinessQuest, a business valuation and business brokerage firm serving Southern California and can be reached via email at ed@businessquestbrokers.com.