October 2006 Selling Points The safe and effective way to approach the sale of your business By Shayla Byrd
All good things must come to an end, and when it comes to a business, the end usually comes in one of two forms. “You either sell it, or you close it,” says Bren Letson, a Nashville-based broker with VR Business Brokers.
Sometimes closing a business is inevitable. Health matters, family issues or money problems often lead to situations where maintaining a business is no longer a viable option. Other times, such circumstances may prompt business owners to sell. Still, whether voluntary or not, most small business owners would rather reap the financial rewards of selling rather than simply closing the doors forever.
Selling a business, however, can be complicated and very time-consuming—the average business sale transaction takes about six to twelve months, estimates Dewey Hammond, managing director of Chattanooga’s Decosimo Corporate Finance—so it’s important that business owners are in the right frame of mind when they embark on the process.
“The biggest mistake that some people make is that they don’t plan for the sale,” Letson says. “They wake up one day and say, ‘I’ve had it. I’m selling this thing.’ Then they proceed based on impulse.”
Usually this frustration is the culmination of an extended period of loss of enthusiasm for the business, Letson says. And even worse, this type of frustration also indicates that the business doesn’t have the value that it could potentially have—meaning that the business certainly won’t sell as quickly or for as much money as it might have had the business owner made the proper considerations up front.
The best way for business owners to approach a sale is to figure out from the beginning what their objectives are. That way they’ll know what type of experts to consult. “If you’re trying to achieve some sort of financial objective, such as retirement, then the process of selling might involve someone like an estate or financial planner,” Letson advises. “If you’re simply trying to get out, then the process might be a bit more streamlined.”
Also, some business owners—particularly first generation small business owners who feel an acute sense of loyalty to their employees and customers—are concerned with how the new owners will manage the company after the transition, and may want to have more say over the terms of the sale. Others, who are looking to sell for strategic reasons or for liquidity, may not care as much about what happens to the company once it’s sold.
These are all things that a business owner must consider before putting his or her business on the market.
According to Hammond, there are three phases to the selling process: the preparation phase, the marketing phase and the closing phase. And sometimes people make the mistake of jumping into the process midstream instead of taking the time to plan.
Usually, the first person that a seller turns to is a business broker. A broker balances what the value of the business with the current state of the market to come up with a fair asking price. From there, the broker meets with potential buyers to discuss the specifics of the transaction. Some brokers charge a retainer fee, while others are paid on a commission basis only after the transaction is completed. Fees usually start at 12% and go up from there.
Attorneys are also advantageous when it comes to selling a business. During negotiations, they help the seller sift through legal jargon to get to the heart of each offer, and in closing transactions, they make sure that all the paperwork is done thoroughly and promptly.
But before a seller can even get to the point where a broker is putting the business up for sale, he or she must make sure that the business is in the best shape possible. On one hand, there’s not much you can do to make your business more attractive once you make the decision to sell it, Hammond says. Either it’s a sound and profitable business (or has the potential to be) or it’s not.
Darrel Sheley, president of Business Broker Services in Knoxville, says that, essentially, any business that’s making money is profitable. But the owner must be able to prove it.
This is where a good accounting professional comes in. Whether it’s the CFO of the company or outside council, accountants are vital when it comes time to appraise the value of the business. They also help provide tax advice and address any tax repercussions that may arise as a result of the sale, Sheley says.
“You need to have all of your financial documents up to date and in good order,” Sheley says. “Don’t try to hide anything because it will all come out in the long run.”
Even if your business does happen to have some weak spots, all is not lost. Making sure that all documents are in order is a must. It’s important to be able to effectively communicate your business’ strengths and weaknesses—and how they can be enhanced or overcome—to your potential buyers, Hammond says. “Anything you can do to reduce uncertainty will make a difference,” he says. Honesty once again proves the best policy. If a buyer is the one to uncover any problems, a certain amount of trust could be broken and a potential sale compromised.
Clearing up any lingering lawsuits will also improve the outlook for a business before it’s presented to buyers, as will ensuring that employee satisfaction is high and that any unnecessary personnel are eliminated. Make sure that everyday operations are strong, make repairs and update equipment so that everything is in tip-top shape. Establish a Web presence if you don’t already have one, Hammond recommends—it adds promotional value to the company and increases revenue, which in turn results in a higher selling price.
Another way to improve your businesses’ value is to up your marketing and advertising efforts, Letson says. Having an increased presence in the community, whether it be through paid ads, press releases or sponsorships, makes your company more attractive to potential buyers.
Maintaining an objective eye is also key to getting the maximum return on a business sale.
“Buyers are going to examine the business very carefully,” Hammond says. “Sometimes sellers make the mistake of not looking at it from a buyer’s point of view.”
Buyers examine a plethora of components when considering a business—things that sellers might not always consider, such as: How stable is the cash flow generated by the business? What are its assets? Are there any necessary investments that need to be made in the form of equipment, office space, etc. What about the quality of the employees? Is there a high turnover rate?
These are all things that business owners need to consider before selling, because they—along with external factors, such as the economy, market, location, etc.—are the major deciding factors in a business’s valuation.
Understanding the different components that make up the estimated value of a company is critical because even though CPAs are the ones who usually appraise a business’s worth based on the numbers, it’s the company’s overall evaluation that influences its listing price. And things such as intellectual property, operational strengths and weaknesses, performance history and forecasts all play a major role.
“I encounter this situation quite a bit,” Letson says. “Business owners come in with an evaluation of what they want from the business, not what they need. Their pride and optimism in their business isn’t necessarily shared by the market.”
If a business owner is dissatisfied with the value of his or her company, there are plenty of business consultants who can evaluate the company and determine those facets that need to change in order to turn the numbers around. Increasing profitability and/or sales can have a drastic effect on the company’s valuation. Sometimes, the best bet is to simply wait it out until the right buyer can be found. But of course, given the circumstances, that’s not always an option.
Either way, though, a competent team of trusted professionals is necessary to make sure that the business is in shape before offering it up to the scrutiny of potential buyers. “There’s nothing worse than putting heaps of time and effort into maximizing your business’s value, only to have the value decline again after people find out that your business is for sale,” Letson says, pointing out one of the paradoxes involved in selling businesses—a business is best sold when few people know it is for sale in the first place.
If news that a business is up for sale becomes readily available to the public, customers and employees may leave, decreasing productivity, revenue and overall value, Letson says. So phrases like “nondisclosure agreements,” “reputable” and “trustworthy” become very important to business owners looking to assemble a group of impartial consultants and experts to help sell their companies.
With all the planning and preparation required, it’s much harder to sell a business than it is to buy one. But with proper guidance and plenty of patience, you’ll find that the right buyer will eventually come along with the right price. And in the end, once all the paperwork is signed and all the attorney’s fees are paid, you’ll be able to reap the benefits of all the hard work you’ve invested over the years.
Email to a Friend
Print-Friendly Format