You nurtured your business, you poured money into it, you sweated over it, you cursed it and maybe you even loved it.
But now you're thinking it's time to move on.
If you are considering selling your business, experts advise approaching the transaction carefully and methodically. Sloppy preparation for the sale can have a negative effect on the sale price.
"Making the sale is not as easy as it may appear," says Debbie Allen, a retail business expert and author of Confessions of Shameless Self Promoters (Success Showcase Publications, 2001). She's also owned and sold six businesses.
"Every day small-business owners make drastic mistakes when selling their businesses and lose thousands of dollars in the process," she says. "All their hard work and long-term investment goes down the drain in the process."
To ensure an orderly and profitable sale, business owners should follow basic steps recommended by real estate brokers.
Unless your business is wildly successful, most brokers recommend keeping your plans to sell confidential. "I know a restaurant owner who told everyone his place was for sale," says David Norris, a commercial real estate broker with Arthur Berry & Co., in Boise, Idaho. "That scared off his customers, and he didn't sell the business; he went broke."
If competitors learn that the business is for sale, they will probably make moves to steal customers.
After making a firm decision to sell, it's best to interview several brokers before picking one to handle the sale.
"Selling a business is not a science, it is an art," says Samuel S. Tuttle, author of Small Business Primer: How to Buy, Sell & Evaluate a Business (Street Smart Books, 2001.)
"During the entire process of selling your business, make sure you pay attention to the people skills of the professional you use to sell your business. Businesses do not sell themselves; people buy from people."
In other words, Tuttle says, you should trust your broker and believe he or she is always working in your best interests.
Brokers should work on a commission basis only—usually 10 percent to 13 percent of the selling price. Norris advises walking away from any broker who asks for a fee in advance.
Using a broker connects the business owner to a strong local and national network of potential buyers.
"There are always people shopping for businesses, and brokers always have a list of clients," Norris says.
Setting The Value
The first question most brokers ask is: Why are you selling the business?
"That's the first thing I want to know," Norris says. "The answer will tell me their motivations, the urgency and if they're serious."
The reasons people sell are varied: they're ready to retire, they're ill, they're tired, they're getting a divorce, someone's died. The answers inform the broker how the sale should be handled. For example, some people are willing to wait for the right offer, others must sell as fast as possible.
Next, a broker usually asks the owner how much the business is worth.
"That usually leads to an interesting discussion," Norris says. "It's not uncommon for people to think the business is worth more than it actually is."
To establish a meaningful price, an owner must assemble all financial information. Without complete records, it's impossible for a broker or a potential buyer to understand the potential of the business and what it's worth.
Your accountant will explain what records are needed to establish a pro forma statement and then organize it into a report. Items will include audited profit and loss statements; tax returns; equipment and inventory lists; current asset and liability statements; bank statements; billing records; existing contracts, including copies of mortgages or lease agreements; proof of patents, trademarks and copyrights; and anything else that proves the value of the business.
Based on these records, the business broker can help set a fair price, says Norris.
Unfortunately, a common problem for brokers is that owners believe they can sell their perceived potential for the business.
"What I have to tell them is that the business is worth what it is because of what they've done, not because of what they might do," Norris says. "I tell them, 'If you ain't done it, no one's gonna pay for it.' That turns most people's heads."
The only way to prove potential is to show sales records that indicate income is increasing significantly over time.
Businesses that handle cash transactions frequently present valuation problems because many owners skim cash.
"If you are putting cash in your pocket every day, you get the value of that money immediately," Norris says, "But you can't pass that on to the buyer. You can't price what you can't see."
After examining financial records, brokers do research to learn what similar businesses are selling for around the country. They use a variety of valuation techniques, including examining accepted industry standard financial ratios. Brokers also examine inventories and hard assets such as computers, equipment and real estate.
"Get a realistic understanding of the real market value of the business," says Ernie Doud, a partner with DoudHausnerVistar, a business consulting firm based in Glendale, Calif. "Don't settle for guesswork, or for the estimates of well-meaning friends. Seek the advice of competent professionals, and listen to their advice."
Making The Sale
After the price is established, the broker will usually list the business locally and nationally in newspapers, trade journals and other specialty publications. The broker also is likely to make contacts among industry trade groups, local business associations, and personal acquaintances.
The name of the business will remain confidential, and potential buyers are required to sign nondisclosure statements that prevent them from releasing any information.
Tuttle explains that some of the best prospects might be right under the company roof—partners and employees. If you have been running the business with others, those people are likely candidates to take over. Especially in small businesses, long-term employees usually know the business inside and out, and have the potential to make great owners.
Generally, a potential buyer's offer will be influenced by how soon he or she expects to realize a return on the initial investment. Five to six years is usually considered a reasonable length of time to recoup, Tuttle says.
Other factors that can influence a buyer's offer are the age of the business, how easy or difficult the business is to operate, and the local and national economic climate.
The broker should handle all negotiations once an offer is made. Selling a business is often an emotional experience for an owner, but emotions should not be brought to the negotiating table.
"Don't be your own negotiator," says Doud. "Involve someone who is both objective and knowledgeable at negotiation and deal structuring."
Additional reporting by John Riddle.
Natural Foods Merchandiser volume XXIII/number 5/p. 16, 22