When small business owners decide they’re ready to move on to other projects, to slow down, or even to retire altogether, selling their business is one of the options available to them.  Understanding the basics of commercial sales can minimize legal and financial problems during the sale process.

Owners who seek outside consultation should still understand the big picture in order to: (1) oversee the sale, (2) ask the right questions, and (3) properly weigh the options provided by professional consultants, e.g. lawyers and accountants.  As the facilitator of a business sale – especially if you own the business – it’s critical to understand widely-accepted, best practices of selling a business.

Consider timing. Research shows that, under normal market conditions, only one-quarter to one-third of all small companies on the market actually sell.

Selling when a firm’s profits are hefty and the bottom line sound is certainly easier than trying to unload a struggling enterprise. Lower interest rates, a healthy economy and financing options clearly increase the likelihood of a profitable sale. Given today’s economic uncertainties, staying open for business may be the most prudent course. Unless the owner lacks other options, selling in an unfavorable market greatly lowers chances for a successful sale.

Tighten up company finances before posting a “For Sale” sign.  A year prior to selling, make sure taxes are current and all payables are up to date. Make every effort to collect accounts receivable, as well. At least 12 months prior to announcing the sale, hire an accountant who specializes in commercial sales.

Upgrade outdated or inadequate business software. The goal is to generate accurate documentation for prospective buyers’ review. New software should accurately record inventory records, invoices, cash-flow statements, audit reports and other fiscal data.

Client relations management (CRM) software shows day-to-day operations at a glance, providing complete understanding of order flow, projects in progress and a history of successful engagements with repeat buyers or regular clients. Update your business with CRM. It can add credibility to business operations and simplify the transition of ownership.

Use a business broker. These professionals assist in the purchase and sale of companies, usually at a fee of up to 10% of the selling price. One of the chief advantages to using a broker is that the company owner continues to run the firm during the sale process, which can be lengthy.

A business broker can:

  • Provide assistance with sale pricing
  • Offer practical, unemotional advice
  • Interpret market conditions
  • Identify and qualify serious buyers
  • File sale-related paperwork
  • Act as a liaison between seller and attorneys, accountants, bankers, insurance agents and other parties involved in the sale
  • Communicate with appropriate parties including vendors, clients, employees and the community.

When choosing a broker, research credentials. Determine that the broker has a current real estate license issued by your state. In addition, the International Business Brokers Association (www.ibba.org) issues the title of certified business intermediary (CBI), a recognized designation in the field.

Conduct a business valuation. Doing this compels a business owner to get company affairs in order prior to a sale. It also sets a realistic valuation on the company. A valuation weighs tangible assets like real estate and equipment. Intangible assets, like intellectual properties and business reputation, also factor into an accurate valuation of a business.

Factors determining a business’ worth run the gamut, so hire a professional appraiser to do the legwork. A pro may find assets an owner overlooks. When searching for a valuation specialist, seek one who’s earned formal credentials. A number of organizations offer professional certifications.

Communicate with potential buyers in clear terms. Once a sale opportunity presents itself, some proprietors find final negotiations unexpectedly complex. To avoid sabotaging the deal, discuss major provisions before talking price. Honest conversation may eliminate unqualified buyers immediately – a task a business broker can take on. Topics to address are:

  • Assets that are part of the sale, such as key contracts
  • Purchase price due at closing, as well as payment plans
  • Seller’s role in the company after the sale
  • Final selling price

During negotiations, the owner should notify the buyer that everything discussed will be subject to the company attorney’s review.

Develop a detailed sales agreement. The Small Business Administration (www.sba.gov) provides a list of elements that must appear on the sales agreement at closing. Of course, an attorney should review the terms prior to signing.

Start early, seek professional advice and keep expectations realistic to enjoy the positive outcome all parties desire during the sale of a business.

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.