Are You Planning to Sell Your Company?
November 3, 2021
Selling a good company is a complicated and trying process. It requires substantial effort and ongoing commitment that could last months or longer. One reason the sales process takes this long is that sellers aren’t always ready for the sale.
Here are nine steps owners can take to ensure they are prepared to sell their business at the best possible price.
1. Make sure you want to sell
An easy way to derail the selling process is the owner attempting to sell a business they are not ready to sell. This scenario quickly scares away brokers and potential buyers.
Business owners have a strong attachment to their companies. This common situation can make selling a business very difficult. An owner must examine the reasons for selling and determine if they are willing to move forward.
If the owner does decide to proceed, they should consider changing their perception of your business. I recommend owners look at it dispassionately as the “asset” that it is—no different from a share of stock. This perception helps adjust the frame of mind about the transaction. It also helps negotiations because the owner’s expectations are more realistic.
2. Take the buyer’s perspective
Owners should look at the business objectively from the perspective of a potential buyer—that they were trying to buy the business from someone else. What would the owner need to see to encourage them to buy it? More importantly, what would discourage the owner from buying it?
This point of view allows the owner to focus on areas of the business that need improvement.
3. Get an accurate valuation
Most business owners overestimate the value of their company. This situation can create issues during price negotiations and is a common reason why deals fall through. To negotiate effectively, an owner must know the actual market value of their business.
Owners can get a quick estimate from the Business Reference Guide. It provides an idea of how similar companies in the industry are valued. The guide has no specific reference for companies in the glass industry, but owners can look under “Construction - Specialty Trades.”
There are a few methods to value a business. The most common methods use Seller’s Discretionary Earnings (SDE) or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for the calculation. They are similar but have slightly different addbacks. These measures allow buyers to compare different businesses objectively. Most small companies are valued using SDE, while larger companies are valued using EBITDA.
The Business Reference Guide suggests the following valuations:
- 2 to 3.5 x EBITDA
- 2 to 2.5 x SDE + Inventory
The above methods provide an initial reference but are not perfect. Owners should also retain a professional appraiser. An appraiser can provide a more accurate representation of what your business could sell for in your market.
4. Put your financial records in order
Buyers want to acquire a good business and look for companies whose financial records are in order. Unfortunately, many small business acquisitions fall through because the seller’s financial records are disorganized and inaccurate.
Owners must ensure their accounting records are accurate and up-to-date before listing the business for sale. This step shows buyers that the business is well-managed. Financial reports also allow buyers to determine the EBITDA and SDE of the company and help them generate a valuation.
Company tax records must be well-organized and up-to-date as well. Unresolved tax problems can easily derail a transaction permanently. The best strategy is to work with a CPA to ensure financial and tax records are spotless. Sellers should be prepared to show a minimum of three years’ worth of financial records and tax returns. Having finances ironed out ahead of time increases a company’s marketability and helps justify the asking price.
5. Get your operations in order
Potential buyers will examine a company’s operations to determine if the business is well-run. Offices, warehouses and manufacturing areas should be clean and well-maintained. Employees must be professional and engaged.
Although not required, having an operations manual can help differentiate a business from others. This manual details how to operate the company and is used as a reference by employees. This can be a great tool if it is well-written and has enough details. Buyers will appreciate this manual, especially during the transition period.
6. Consider providing seller financing
Most buyers pay for acquisitions with a combination of their funds and Small Business Administration-backed financing. However, buyers usually ask sellers to provide funding as well. This type of financing ties the seller to the business and gives the buyer confidence in the company’s strength.
Offering seller financing can help the sale of your business, but it is optional. If an owner must offer seller financing, they should offer a token amount such as 5 or 10 percent. However, the owner may need to offer more to help the transaction close. It all depends on the circumstances. If an owner offers seller financing, they should have an attorney structure the note.
7. Speak to an experienced CPA
Retain a good CPA well in advance of placing a company for sale. The CPA can help fix and present the company’s financial and tax reports correctly. Additionally, the CPA helps an owner structure the sale and handle any business and personal tax implications. It’s best to partner with a CPA who is familiar with company sales and their tax implications.
8. Find the right attorney
Look for an attorney with experience in mergers and acquisitions before starting the sales process. An attorney with this kind of experience helps an owner navigate the transaction while ensuring the owner’s interests are protected. Attorneys are expensive but necessary.
9. Speak to a financial planner
Selling a company may be the largest financial transaction in which an owner engages. Once the sale closes, the owner will have access to a large amount of money. Speak to a financial planner before closing the sale and plan how to handle the funds from the sale.