Contributed by Ron Quinn
With any investment you make, it’s wise to plan your exit strategy in advance, especially in the sale of your business. Your business is an investment — mentally, physically monetarily, and emotionally. In owning your own business, unlike some investments, the exit strategy is much more structured than simply calling your investment professional and having them move your investment from one type to another. A business is a living, breathing, operating commodity that will need structure in the sale to protect the investment, which for many people has become their life’s work.
First and foremost, decide whether you’re looking to sell in the very near future, or whether you plan to sell in the next few years. In either event, you need to make sure you have good, easily accessible financial records to make it easier to conduct an evaluation. If you are looking to sell in the future, start the planning process now. Take the time to evaluate your books, records, overhead costs, revenue, and similar data that determine your profitability, since these will be used to prove the value of your business.
Other questions to ponder might be:
- What is your business worth?
- What selling price should you set?
- What methods should you use to sell it? Is it like any other type of sale — place an ad, collect and go?
- What potential liability exists if the transaction is not handled properly?
- Are you going to offer seller financing?
- Should it be a “stock or interest sale” or an asset sale?
- What tax liabilities will there be, if any?
These are all very reasonable and logical questions to ask when assessing how to sell your business.
What is your business worth and what can you sell it for? In years past and in a much different economic climate, one would hear figures of three, four, five times or more of the annual net income. Depending upon the type of business, staffing, tenure, it can still be a buyer’s market. Other things to consider include the remaining term on the business lease, location, competition, industry challenges, and similar factors. If you want to price it correctly, you should seek the advice of a business broker or appraiser. These individuals know current market conditions and the competition presented by other similar businesses for sale. They also have their finger on the pulse of the potential buyers in your market.
How do you market your business? Many businesses are sold by owner from party to party, and many others are sold by a licensed business broker. Because selling a business can be time consuming, many owners choose to list their business for sale by an expert so they can continue to run their day-to-day operations without distractions, which is very important in maintaining their profitability. By doing this, the business does not suffer from “owner neglect” because the management team is spending more time on the sale than on the business. Further, a business broker can protect what you have by pre-qualifying potential buyers, requiring non-disclosure agreements, and maintaining the confidentiality of the sale. The majority of businesses sold are done so in confidence, so as to not cause concern by current management, employees, customers and vendors.
Should you choose to sell it yourself, there are various business websites in which you can promote your business for sale, and market to buyers. However, be prepared with a presentation package, some type of purchase agreement and a confidentiality agreement. Also be prepared for a lot of “lookyloos.” One tremendous way to be prepared for buyers is to have your business “pre-approved” for an SBA loan. You can contact Nevada State Bank’s SBA Department to investigate this possibility. If your business is pre-approved, it will make it much easier for those qualified buyers and will add value to your marketing efforts.
If you offer seller financing, make sure you are protected as the lender, for you in fact become the bank. Make sure there is proper documentation in a promissory note, security agreement, UCC Financing Statement, and perhaps personal guarantees. These are vital to protect your investment.
Many additional factors should be considered when consummating a sale, such as: landlord involvement for any assignment of lease/new lease; ongoing liability for the lease; business licensing (including privileged, such as liquor, gaming, massage, etc.); franchise approval; training; inspections; tax clearances; plus many unanticipated challenges, in order to avert future liability as a seller and maintain a timely closing. It is of vital importance to be prepared and speak with the appropriate professionals when considering a sale. Doing that can save you heartache and perhaps a great deal of money in the end.
Ron Quinn has been a business sale transaction specialist for more than 16 years, supporting “mom and pop” to multi-million dollar business sale transactions with Accelerated Escrow Company/Business Center of Nevada. These companies are small business support organizations based in downtown Las Vegas.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.