Assume, for example, that the business pays for 100% of the vehicle cost for a family member who only works part-time in the business. Let’s also assume that a CPA audits the financial statements and determines that 100% of the vehicle cost is not consistent with Generally Accepted Accounting Principles (GAAP).
7 Steps to Selling Your Small Business
Selling a small business is a complex venture that involves several considerations. It can require that you enlist a broker, accountant, and/or an attorney as you proceed. Whether you profit will depend on the reason for the sale, the timing of the sale, the strength of the business’s operation, and its structure.
- Selling your business starts with identifying your reasons why, making sure your business is in the shape it needs to be in to be sold, and the timing of the sale.
- Preparing for the sale at least a year or more in advance is critical, as it gives you time to improve your financial records, customer base, and other factors that can make the business more successful.
- Determine the value of your business so that you can price it appropriately. Consider hiring a business appraiser.
- Make a decision as to whether you’d rather use a business broker, or negotiate the sale yourself.
- Organize your financial statements and tax returns dating back a few years and go over the details with an accountant.
- Finding a buyer is a huge undertaking that could stretch out several years. Once a good buyer is found, there are a series of financial screenings and other steps that need to be taken to keep the process moving.
- Don’t spend the money all at once. Take the time to work with a financial professional and determine how you want to invest or otherwise use the money.
How to Sell Your Small Business
6 STEPS TO SELLING YOUR BUSINESS
STEP 1: GET A PROFESSIONAL VALUATION
Valuing a business is not always a straightforward process; you may need the service of a valuation firm to determine the true value of your company. Also, using a third-party firm for valuation will bring credibility to the asking price.
BUSINESS VALUE REALITY
Statistics show that the typical business owner has 80% of their net worth tied to their business, so preparing their business for sale to showcase maximum value is critical to their livelihood post-sale.According to experts, small businesses are worth two to five times their annual cash flow, plus any discretionary add-backs, depending on their location, market demand, financial health, eight core value drivers, etc.For many small businesses the focus is on cash flow, it’s very likely that physical assets will form only a small portion of the value of their businesses and is limited to what they generate towards the profit of the business.According to BizBuySell, small businesses with an annual cash flow of $100,000 and under received sales price of about 1.90 times their cash flow. And those with cash of flow $300,000 and above received a multiple of 2.81.
It’s important to note that cash flow alone will not satisfy savvy business buyers; you may need to present prospective buyers with a plan on how the business can grow and thrive without you at the helm.
STEP 2: ORGANIZE YOUR FINANCIALS
In today’s economic climate, buyers are looking to buy businesses that will not only be profitable but also have long-term viability. So many contemplate longer and perform their due diligence before making an offer. Savvy buyers will consider everything from equipment to real estate and business accrual-based financials; it’s your job to get these in order before taking your company to market.
Work with an accountant or business consultant to review your financial statements and tax returns dating back to 3 to 5 years.Create a list of inventories and equipment that you want to sell with the business, including any intellectual property and intangible assets.You should also provide information about how the company is run or present potential buyers with an operating manual to help them understand how you conduct business, buyers are looking for turn key operations.Make sure that all documents are organized and presented in a way that is useful to the buyers. You shouldn’t leave out any important information; you need to be as transparent as possible so that buyers know what they are getting. These will save you lots of time and future headaches, and they’ll present a consistent and unified story of the historical and future business.
STEP 3: INCREASE YOUR SALES
Companies with healthy income streams and multiple revenue sources are attractive; so you need to improve the overall performance of your company in order to maximize profits and ultimately your business value. Keep in mind that selling your business when sales are declining can hurt your profits.
Most buyers will look at sales and gross profit records to determine the viability of a business. They desire companies with sales growth year-over-year of 30 percent or more, which indicates buyers are looking to acquire businesses that are thriving, not surviving.Savvy buyers will also inquire about the contracts you have in place and whether those contracts are transferable.They’ll evaluate the future potential of your revenue streams as well, identifying recurring revenue opportunities that indicate ongoing sales sometimes years in the future.One thing that can put off a potential buyer is a business that has only a few customers. A significant revenue source will be lost if any of those customers left, so many buyers take the number of customers that a business has into account when negotiating.To make your company more attractive to buyers, you need to boost your sales and diversify your customer base if necessary. A diverse customer base, multiple income sources, and a robust management team will all help increase the value of your business.
STEP 4: TIME YOUR EXIT
Experts advise that business owners should plan their exit a year or two in advance. Being prepared will also help you get things in order including improving your sales, financial records, and customer base, which will make your business more attractive to potential buyers.
Statistics show that only 20-30% of businesses put on the market will actually sell, so timing is everything.You want to sell your business when things are good. Buyers want to buyer a growing and profitable business.You can’t expect to make a decent profit by selling your business overnight, experts warned.Markets change all the time; it is your responsibility to stay up/to-date with the current trends so that you can market your company as a leader in your industry.Don’t wait until disaster strikes before selling your business. If you let that happen, it will deplete the value of your company or lead to a potentially significant loss. The best time to sell a business is when it’s in good financial shape, experts said.
6 Mistakes to Avoid When Selling Your Business
1. Not Planning Ahead
2. Waiting too Long to Sell
3. Misrepresenting Your Business
4. Not Keeping Business Confidentiality
Nearly all sales of businesses include a nondisclosure or confidentiality agreement. This is not paperwork that is done when the business sells. It must be done before you provide any financial information about your business.
5. Finding the Wrong Buyer
6. Trying to Sell Your Business Alone
This is a tough row to hoe. The myriad of paperwork that’s required is daunting for the average business sale. This is where brokers are worth every penny. Brokers that have completed many deals will streamline the process. Brokers have contacts, including lenders.