Getting ready to sell your business
There are many factors to explore before selling your business. Discover the important steps to take before handing off your business to the right buyer.
When selling your business, timing is everything.
Careful planning can ensure your business is put up for sale when it’s most valuable and appears the most attractive to buyers. The sale of your company should also fit with your personal goals, such as retirement.
Make a plan to sell your business by working closely with key advisors – your lawyer, accountant, business broker and banker. Work with them to:
- Set a timeline and prepare your business for sale
- Determine the value of your business
- Put any financing requirements in place
- Ensure assets are easily transferrable
- Get valuable support during the selling process
Step 1: Set a timeline to sell your business
Try to start organizing for the sale as early as possible. Ideally, you should begin to prepare at least three years before you want the sale to occur.
By planning in advance, you’ll be ready if an unexpected opportunity to sell comes up, or if market conditions become better for selling.
Part of planning ahead involves figuring out some basics – such as whether you’re willing to stay on during an ownership transition period, whether you want to sell by a certain date, and what price you think your business is worth.
Step 2: Determine the value of your business
A qualified appraiser or accountant with the Accredited in Business Valuation (ABVABV) designation will help to put a price tag on the tangible and intangible aspects of your business.
While tangible assets (like company delivery vehicles) are fairly straightforward to assign value to, a professional valuator will know how to place value on intangible assets including intellectual property (IPIP), brand, employee culture and customer goodwill.
How is business value calculated?
A business may be valued a number of ways:
- Liabilities subtracted from assets
- Net profit
- Cash flow
- Return on investment
- Revenue growth over the past three years
- Projected revenue and profits
- Industry multipliers (what buyers are paying for similar companies in your industry)
A full business valuation may also include factors such as marketplace competitiveness, productivity, innovation, and potential industry game-changers such as the development of a disruptive new technology.
Financial statements are one of the first things a potential buyer will want to examine. A solid track record of profits will show that your business has made money in the past and is likely to stay in the black for the foreseeable future.
Step 3: Make assets transferrable to the buyer
Business buyers are searching for a profitable operation or a strategic acquisition they can get without encountering too many problems. It’s important to make sure your business offers transferrable assets so a buyer can step right in without too much trouble. Transferrable assets include things like a customer database, equipment, and your operations manual which explains how to run different business systems. A buyer also wants:
- Documented processes and instructions to perform daily operations
- Good financial records, including that taxes are paid up and any short-term debts settled
- Optimal levels of staff and inventory for maximum efficiency
- No unresolved legal issues
- A standardized business system; for example, a restaurant can develop processes and procedures to make sure employees cook food and serve customers in a consistent way
- No outstanding business debt, if possible; work with your banker to minimize or retire business debt
It’s the combination of these elements that will put you on track to obtaining your preferred sale price.
Step 4: Prepare for the business selling process
The selling process could take months or years, so be prepared to be patient.
You can make a great first impression with buyers by keeping your premises clean and orderly, having information about your business readily available, easily describing relationships with customers and suppliers, and by being prepared to talk about your reason for selling.
Hire a business broker to sell your business
A business broker will help you to shop for suitable buyers and facilitate the buy/sell process. Typically, a business broker will work with companies earning annual revenue of $5 million or less. A business broker will earn a commission based on the sale price of your business.
Hiring a business broker will:
- Ensure smooth negotiations with potential buyers
- Keep your identity confidential so suppliers and customers won’t get nervous
- Allow you to continue to focus on running your business
You can find a business broker in your area on the International Business Brokers Association website.
Expect due diligence from a buyer
Potential buyers will want to review at least three years of financial statements, including income statements and your balance sheet. They will buy your business profitability so be prepared to disclose any non-operating expenses such as loan interest.
Evaluate any weaknesses
Create an action plan for any weaknesses in your business that you want to try to resolve. Outline the steps you’ll take, timeline you’ll follow and resources you’ll allocate. Then assign tasks to make improvements before marketing your business for sale.
Keep it confidential when selling your business
It may be wise to keep the sale of your business confidential, if possible. Beyond key employees with management roles, telling employees you are selling the business might cause uncertainty, affect loyalty and hurt employee morale. The same goes for customers – they may become unsure about doing business with you, and that could affect any potential deals. Once the business sale is solid, you can make an announcement together with the buyer.
Business buyers look for a low-risk purchase offering good cash flow, solid systems and real growth potential. Being prepared for the sale of your business will make your opportunity more inviting to buyers and help make the transition process smoother. Speak to your BMO Banker today to help you get started.
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