Selling Your Business

By Entrepreneur Staff


Selling Your Business Definition:

The process of putting your business up for sale by an individual or other company

Just as you needed a plan to get into business, you'll need a plan to get out of it. Selling or otherwise disposing of a business requires some forethought, strategizing and careful implementation. In some ways, it's a little more complicated than starting a business. For instance, while there's really only one way to start a company, there are at least three primary methods for entrepreneurs to leave the businesses they founded: selling, merging and closing.

Deciding to sell the business you have worked so hard to grow is rarely an easy decision. However, it may be the right one under some common circumstances. Selling may be preferable to owning if:

  • You or another owner get divorced and need cash for a settlement.
  • Partners who own the business decide to dissolve their partnership.
  • One of the owners dies or becomes disabled.
  • You are ready to retire and have no heir to continue the company.
  • You want to do something more challenging, more fun or less stressful.
  • You don't have enough working capital to keep going.
  • The company needs new skills, a new approach or resources you can't provide.

If you're aware of the factors that indicate selling is a good idea, you can time the sale to take advantage of high prices. Usually, you'll get the most for your company when sales are climbing and profits are strong. If you have an unblemished history of solid performance, by all means, sell the company before trouble strikes. Other factors that may affect the timing of a sale are availability of bank financing, interest rate trends, changes in tax law, and the general economic climate.

You can sell your business yourself, but many owners contract with a professional business broker to handle the job. In addition to the training and awareness of relevant legal, tax and accounting considerations, a good reason to use a broker is to protect your anonymity and confidentiality. If you're advertising your business for sale and showing it to prospects, it compromises your ability to continue leading the firm. A broker can front for you, screening prospects and keeping the identity of the business owner secret from all but qualified buyers.

Most business buyers are individuals like you who want to become small-business owners. But sometimes you can transfer ownership of a business to another business in a merger or acquisition. As a rule, businesses have deeper pockets and borrowing power than individuals, and they may be willing to pay more than individuals. Businesses also tend to be more savvy buyers than individuals, increasing the chances your business will survive, albeit perhaps as a division or subsidiary of another company. However, businesses can not move as fast as individuals. It may take you a year or more to get your company ready to be merged or acquired. You will need to:

  • Clean up the balance sheet.
  • Drop poorly performing products.
  • Terminate insider deals, such as property the company is renting from you or family members.
  • Trim excessive fringe benefits.
  • Make sure you're paid up on all taxes.
  • Have at least two years' worth of audited financial statements.

The best candidate for a merger is a company that sees yours as a strategic fit with their own firm. If you have something they want and can't find elsewhere, such as a unique product or distribution channel, they may be willing to pay a premium price. A competitor who only wants to put you out of business is usually a poor merger prospect, however. This buyer is motivated only by price and probably isn't interested in preserving the business.

Sometimes, the best thing to do is simply sell your inventory and fixtures, pay your creditors and employees, close your doors, and walk away. Closing may be the best option if your business is failing, isn't valuable enough for anyone to want to acquire it, or is the type of business that is unlikely to be valuable without you personally operating it. (A law office is a good example of this.) If you can't raise enough money by disposing of your assets to pay everyone off, you can give them what you have and promise to pay them the rest later on. You can usually avoid legal wrangles if the debts are small enough.

Variations on this theme include making formal or informal arrangements to pay off your creditors, filing for voluntary liquidation, and declaring bankruptcy. Only bankruptcy is intended to give you a second chance. The others are almost certain to result in the end of your business.

Value, like beauty, is in the eye of the beholder. There are probably as many ways to define value as there are businesses. The basic definition is how much money the business could be expected to sell for on the open market. But that's dependent on what a hypothetical buyer is looking for, how the business has positioned itself, and exactly who is doing the valuing. In this sense, value does not necessarily equal net profits or even break-even performance. Cash flow is usually more important than profits are when valuing small businesses.

An entrepreneur may chalk up a trip to Hawaii for a meeting as a business cost or keep a spouse or child on the company payroll when a publicly held company would not. To accurately assess the value of a business, the ability to employ family members and mix business with pleasure must be accounted for.

Value may also come in other forms. Ownership of a patent, proprietary process or trade secret may, by promising exceptional future cash flow, increase the value of a business. Companies that dominate a market, no matter how small, are often sought out for purchase at premium prices by other firms that, for one reason or another, want to add that niche to their existing businesses. There are different kinds of value for different kinds of people.

Many businesses count their physical location as a primary component of value. That's especially true in the case of restaurants and other retail businesses and, again, is not necessarily connected to cash flow or profit. Some retailers make a practice of buying businesses only for their locations rather than how much or what they sell, or who they sell it to, figuring that a high-traffic spot will eventually prove a winner for some business combination. The business itself may not be doing well, but if the business got good terms and conditions on its lease, and it's in an excellent location, sometimes they can switch what they sell there.

Location may also play a starring role in value if a company is located in a resort community that has a lifestyle that's attractive to would-be business owners. Other businesses, such as bed-and-breakfasts and bookstores, may have higher values because they appear glamorous or simply interesting to potential buyers.

The intangible known as goodwill is another key consideration in a business's value. Goodwill may range from a long-established distribution network to a sterling market reputation. And sometimes a buyer will pay top dollar to obtain a business with great goodwill.

Experts agree that if you want to boost your business's value, pay close attention to the bottom line of your cash flow statement. That's because most of the time, the value of your business is simply a multiple of the cash flow it generates.

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