An owner deciding to sell a small business faces many unknowns. This Brief is meant to clarify many of the unknowns and guide the owner in some of the process of actually selling his/her business. First consider why you are selling your business and the effects this will have on you, your family, and your employees.
Getting Ready to Sell
The facility, inside and out, needs to be as clean and organized as possible. All systems must be in good working order, electrical up to code, etc. Make sure that daily operations are meeting contemporary standards of good business, including accounting practices, inventory controls and hiring practices, etc.
Have a CPA review* financial statements. You will want to create forecast financials and a business plan. You will want to make sure there is at least one employee who understands and can manage the business. Management that is highly dependent on you can lower the value of the company. Be sure to run the business as though you were going to own it in the future.
Finding a Qualified Prospect
In any sale you need to identify qualified prospects. Finding qualified prospects for selling a Small Business is essentially about networking. A qualified prospect should have a good credit history and substantial assets. You can ask for his/her personal financial statement. Also, you might want to assess how this prospect would treat your employees.
Networking by the owner sometimes works in two cases. A family member may be capable and interested. A minority owner/key employee may be capable and interested
Random networking by the owner rarely works (talking to someone at a soccer game). Ironically, networking by the owner must be done very confidentially. Employees, customers, and vendors should be kept unaware until a deal is real.
Networking by a Business Broker is a primary reason many owners choose a Business Broker. When you contract with a Broker you are essentially using their networking power and their ability to keep confidentiality.
Financial and Strategic Buyers
Financial buyers represent the largest segment of buyers and are typically looking for a standalone business to buy and grow. They often look for businesses they can finance through the seller or other debt financing. These buyers typically look to the prospective business to have sufficient cash flow to service that debt.
Strategic Buyers are fewer in number and buy companies specifically as a synergistic fit to their existing holdings, for which they are sometimes willing to pay more. If your company doesn’t represent a synergistic fit, they are not interested.
Valuation of a business is often some multiplier of EBITDA (or Earnings Before Interest, Taxes, Depreciation and Amortization). In other words, actual cash generated by operations in the past few years. The more attractive the industry, and the business, the higher the multiple.
Valuation can be lower if the current owner is crucial to the successful operation of the company. Prepare ahead for a key employee to learn to manage the business well without you.
A competent Business Broker can guide you to a realistic selling price to actually sell your business. Your SCORE Mentor or an accountant/lawyer with experience selling small businesses can offer guidance on valuation as well. Small businesses usually avoid discounted cash flow valuation (estimates about future earnings and interest rates).
Terms are as important as selling price. Negotiate price and terms together until both parties are essentially equally unsatisfied.
- To determine interest in your company, a buyer wants to learn about company history, where the business is headed and see 2 years of up-to-date summary financials.
- If prospect remains interested, he/she will want to learn more about the company so an offer can be made. This may include a more detailed business plan with Review* financials and tax returns. Your CPA can assist in setting up internal controls and doing yearly Review* of financials (at least two years ahead of sale).
- Prospect will want to interview you, the owner, maybe several times.
- Once an offer has been made and a price agreed to, the process of Due Diligence begins. This allows the buyers to inspect the business in detail to verify that it has been accurately portrayed. Once Due Diligence has begun it is unrealistic to believe that the pending sale can remain a secret from the employees.
- All contractual understandings between buyer and seller should be in writing and approved by attorneys representing each side. Included in this could be a commitment not to compete for a specified number of years, notification of sale to suppliers, employees, bankers, creditors, etc., and a guarantee that full disclosure of current or threatened liabilities has been made.
- Buyers often ask the seller to finance the transaction. Be sure to assess the risk in so doing should you be inclined to do so.
- A sale can be via stock or assets. Buyers usually prefer the assets transaction as it protects from certain unknown risks (such as lawsuits unknown at sale time).
Who Should Handle the Sale?
Business Brokers are usually the best option for owners selling a small business. Brokers bring knowledge of the marketplace, networking expertise to attract potential buyers, have contacts with sources of financing and bring both parties to the closing table. For this, expect to pay about 9% of the sales price for a $1m sale and about 5 1/2 % for a $5m sale. Some of this may be requested up front. Carefully check out broker candidates. Seek those with experience in your industry and who have sold companies like yours in the past. And check their references.
If you sell to a family member or an employee/minority owner, you may sell your company using a lawyer familiar with small business sales.
* With a review a CPA obtains limited assurance that there are no material modifications that should be made to the financial statements. With an audit a CPA obtains high but not absolute assurance about whether the financial statements are free of material misstatement. For smaller businesses: $3000-6000 for review and $6000-9,000 for audit.
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