There are many reasons to sell a business. Sometimes you’re tired of the grind. Sometimes an illness or other life-changing event gets in the way. Sometimes you just need to become “liquid” to grab another business opportunity. The reasons people sell are diverse, but one thing that is common to all sellers is that they want the best price possible. That means if you’re a small business owner looking to unload your company, you shouldn’t do so in haste. Careful planning is the key to making the transaction go off without a hitch. In this article we’ll show you how to get the most out of your small business when you decide to move on to bigger and better things.
Plan To Sell From The Get-Go
When an entrepreneur starts a business, plenty of thought goes into the product, the customers and the demographics of the market. However, budding tycoons should also think about their ultimate exit strategy and try to estimate under what conditions they’d like to call it quits. Although it’s early on in the venture, you should also try to estimate what you ultimately hope to sell the company for in terms of dollars and cents.
Look for similar businesses for sale in the area and speak with local real estate agents to determine how the enterprise should be valued. For example, are sale prices usually based on a multiple of sales, cash flow or earnings? Or are balance sheet items or book value more important?
Business people must determine the method of valuation, apply it to the prospective business and then attempt to determine what it might be worth one day based on a reasonable growth rate. If nothing else, this will accomplish two things:
- It will help you determine if you want to get involved in the business in the first place,
- It will give you a target to shoot for and some level of comfort that there will likely be a payday for your blood, sweat and tears.
Make Time Work For You
As mentioned above, when starting a business you should think about when you plan to sell the enterprise, but this plan needs to be somewhat flexible. The market for commercial real estate might not be favorable in the year that you plan to retire or sell, or the business that you are in might be having an off year, and thus be less attractive to a potential buyer.
To help ensure flexibility, keep some extra cash on hand to help you weather such a storm. Make certain that you have the appropriate management and other tools and resources in place so that if you must hold onto the business for a year or two more than originally planned, you have the means do so.
Finally, and perhaps most importantly, attempt to diversify your assets and income stream. Many business owners make the business their lives, and depend on its sale for their eventual retirement. By diversifying your assets (in stocks, bonds, other real estate, etc.), you may find it easier to deal with the uncertainties that are part and parcel with owning and selling a business.
Consider How You’ll Sell
After a year or two of operating your business, you should have some idea of when you want to sell, the business’s average rate of growth and what it will probably be worth in X number of years. But how will you sell?
There are several options, and not all of them involve getting out of the business entirely:
- You could hold a note on the business.
- You could sell the business, but retain the underlying real estate.
- Or, you could opt for outright cash sale of both the business and the land.
You should consider the feasibility and attractiveness of these options when starting/buying and during ownership the business. The choice you make will affect the income stream you’ll ultimately receive in retirement.
Dress Up For The Big Dance
Once you’ve decided that you want – or need – to sell, it’s time for a little salesmanship. Ask yourself what a buyer might be looking for in a business and then make adjustments accordingly. For example, is liquidity or cash on hand an attractive feature in that type of business? Or, are aesthetics or a certain type of management more important? Think like a buyer. Once you determine what it is that makes your particular business attractive, you can enhance that feature as much as possible.
Make Friends with a Real Estate Broker
It’s important that to select the right commercial real estate broker to list the property. A good broker should have extensive experience negotiating complex contracts, and experience with and knowledge of the industry in which the business operates. Finally, the broker should charge a commission that is reasonable and customary based on the area and the situation.
Sounds great, but how do you find such a person, and what is a reasonable commission?
The best place to begin is the local newspaper. Check for agents that sell properties similar to your own and also those who seem to be getting the most listings. Next you can ask other business owners in the area who they recommend or even call local real estate sales firms and ask who their biggest and most experienced producer is. The goal is to find someone with experience dealing with your type of business. He or she should also be someone that you’ll get along with on a personal level and that will facilitate the sale of your business in a timely manner.
Regarding commission, it’s common for commercial real estate brokers to receive up to 10% on a sale. It is possible to find a firm and an agent who will negotiate a bit, or who will make suggestions for improving the property (and thus allow you to fetch top dollar for the business). Expert suggestions can add a lot of value and make any commission paid well worth it.
Find a Good Lawyer and Accountant
In addition to a qualified real estate agent, it is essential to find an experienced accountant and lawyer to help facilitate the transaction. They will help you minimize capital gains and provide tax planning. They will also help to facilitate a timely transfer of title and any licenses, if applicable. Furthermore, they’ll also help you design a contract and establish a confidentiality agreement so that would-be buyers can’t use or divulge information they gather during the due-diligence process. The extra expense of hiring these professionals will be well worth it, if it means that you are not caught up in red tape.
You can employ the same methods that were used to find an experienced real estate agent, but after years in a particular business you may already have an accountant and/or attorney that you are familiar and comfortable with that can handle the transaction at a reasonable cost. In any case, do your homework, because in the long run it will pay off.
Bottom Line
Selling a business can be as difficult as buying and running one, but with a little planning the process can be made less painful. Planning throughout all stages of ownership and then finding the right professionals to facilitate the process is essential ensure you get the most from your business and secure your retirement income.