SellingFrequently Asked Questions about Selling a Business
When is the right time to sell my business?
Timing is very important. Your business should be performing well and the likelihood that your customers will remain with the new business owner(s) should be good. The less uncertainty a buyer has to evaluate the better. Buyers will reduce their offer if an important contract may be expiring soon. In addition, buyers will want to be able to accurately predict the business’s material costs.
Advance planning is also an important part of making sure your business is performing well. Many times, business owners manage their business expenses to reduce their taxes. Although this is certainly a legitimate business strategy, many times buyers rely on income as reported in the tax return to serve as the basis for valuing the business. Some experts thus recommend a more arm’s length approach to tax accounting in the years immediately prior to the sale of a business. It is also important to allow enough time for the transaction. If the seller has time pressures, he or she may have to accept a lower price.
Another factor in finding the right time to sell your business is for you personally to be prepared for a significant change. As the owner and primary decision-maker, you must be willing to separate yourself from your business. You cannot assume that there will be a role for you in the new organisation.
Other factors over which you have less control are the level of mergers and acquisitions activity in your industry and general economic trends.
Do I need the services of an accountant and solicitor?
The short answer is yes. Even small businesses can be confronted with complicated governmental regulations. An accountant can advise you on the financial and tax aspects of the sale. A solicitor can advise you on the legal aspects, ensure compliance with relevant state and federal requirements, and review the pertinent contracts. Business brokers are experienced in the intricacies of the sale itself.
- Provide a realistic value range for the business
- Help package the business profile
- Locate buyers
- Negotiate the details of the sale
Seek the services of an ‘experienced’ solicitor or accountant. Make sure they have been involved in several commercial transactions and ask for evidence.
How long should I expect it to take to sell my business?
Surveys have found that the average is approximately six months from your decision to sell to the actual settlement. The amount of time it will take to sell your business may vary significantly from this average depending upon a number of factors. These factors include deal structure, the time of year, the true value of the business versus the asking price, the size of the business and the local market. The most important factors are usually price and the ability to effectively locate qualified buyers.
Why is confidentiality important?
If it becomes known that a business is for sale it can be destructive to the relationships the business has in place among its employees, creditors, competitors, and customers. Weakened relationships can deteriorate the company’s position and thereby make it less valuable.
How will the sale be kept confidential?
Most buyers will be required to sign a confidentiality agreement. Only a limited amount of information should be disclosed prior to determining if the potential buyer is either legitimate or capable of completing the transaction. See the section on Confidentiality.
What is the current market value of my business?
To accurately determine the market value of a business, the company’s accounting reports, prepared primarily for tax purposes, must be restated to reflect the true financial performance of the business. Please note that you will get a better price if you:
- Offer the facilitate a smooth changeover of the business
- Cooperate by providing full and frank disclosure about the financial state of the business
- Have the business fully prepared for sale
A business broker will guide you on this, and provide comparative sales data if available.
What should the terms of sale specify?
You should think about the terms you are willing to accept in addition to the price. Factors that will influence this decision include your personal financial situation and the financial health of your business. You should also be thinking about whether to specify an all-cash deal or to offer seller financing and what, if any, level of involvement you want with the business after the sale. You need to be flexible and willing to negotiate to increase the chance of selling your business on mutually agreeable terms.
Will I have to finance the sale?
Some buyers may want to see a willingness on the seller’s part to finance all or part of the sale in order to show that the seller has confidence in the ongoing prospects for the business. In other cases, the buyer is unable to get financing from any other sources. If your business is appropriately priced and packaged, the buyer should be able to get third-party financing, and it should only be necessary for you to provide a limited amount of financing to show good faith. Frequently, seller financing helps the seller to get a higher overall price from the buyer.
When is the best time to sell?
Usually the best time to obtain the highest price for the business is when the sales and profitability are good and trending up. A solid earnings trend will enable the purchaser to pay a higher price and still meet his ROI criteria. A history of good performance also gives the purchaser confidence in the forecasted earnings.
Who will buy the business?
Based on experience, 75% of prospective buyers are individuals who want to control their own destiny. They may consider retail, service, wholesale or manufacturing businesses, depending on their capital available and their skill sets. There may also be companies in the same industry who will look at a strategic acquisition, and consideration should also be given to the suppliers and customers of the business.