For a number of small business owners who may be ready to sell their companies, the past few years have been a time to cut unnecessary expenses, make ends meet and to patiently wait for the market to rebound. There simply was no use in trying to sell the business when company revenues and profits were down. Low purchase-price valuations only made matters worse.
But 2010 saw a slight improvement in the business-for-sale market and many experts expect that 2011 will be a turning point for the industry. Financing options are improving for buyers and banks are putting a new focus on lending.
So, if you're thinking of selling your business this year, here are four tips to maximize your profit.
Like they do for any big purchase, business buyers will do their research before signing on the dotted line. That means it's important for sellers to be ready to demonstrate their business is worth the asking price. Make sure your financial records are in order. Keep a minimum of three years of documents, including tax returns and expense records. These are essential to establish buyer trust in the economic history of the business. Also, be sure to resolve any outstanding business issues. These can include short-term lease agreements, over-reliance on one or a few key customers and any outstanding legal issues.
Don't forget the physical elements of the business as well. Take care of any building improvements such as painting the storefront, cleaning up the distribution facility or re-decorating the interior. The physical appearance is often the first impression a buyer gets, so make sure it's a positive one.
Understand the Market
To set your asking price accurately, you need to know where your business stands in the market compared to other businesses for sale. Overestimating your value can lead to a long and difficult sale process, while underestimating will leave money on the table. Expect an improved selling environment in 2011, but don't make the mistake of asking for pre-recessionary prices.
To determine the right price, find out what similar businesses have sold for or listed for recently. Websites like BizBuySell.com and BizQuest.com allow you to search for similar listings based on factors such as industry, size and location. You can also purchase a valuation report to see detailed information on recent local sales.
Take a look at your own financials as well. If your business' revenue and cash flow have declined, take that into consideration. Buyers will. Don't be fooled into thinking they'll pay you based on business results prior to the downturn. The goal is to set a price that will attract the greatest number of serious buyers and enable you to close a deal at the highest possible price.
Get the Word Out
One way to get a leg up on the competition and ensure the best possible outcome is to hire an accomplished business broker. Check broker references carefully and see if you can find additional references they don't provide themselves.
If you choose to sell on your own then market aggressively. Put together a full marketing plan, including but not limited to getting your listings posted online, in the local newspapers and appropriate trade publications, and networking through friends and family.
Be Prepared To Offer Financing
In today's market, seller financing is essential. While lending from local and national banks will continue to loosen based on the economic stimulus and the Small Business Jobs Act of 2010, banks are still almost universally requiring that seller financing is part of any deal they fund.
That means you'll be required to take a minimum of 20 percent of the sale price in the form of a buyer note that the buyer will pay back over time, with interest. This also means that you'll have an investment in the business even after the sale. The buyer and lender will expect you to participate in a successful transition with the new owner and to help get them off to a strong start.
Mike Handelsman is Group General Manager of BizBuySell.com--located in San Francisco--and BizQuest.com, two business-for-sale marketplaces. Both sites feature business valuation tools that draw from the largest databases of sales comparables for recently sold small businesses, and two of the industry's leading franchise directories.