Selling your small business can be very complex and time consuming. There will be several things that you need to consider before you sell.
Making a profit from the sale of your business will depend on the timing of the sale, the reason for the sale and the strength of the business performance and structure. There are several things you can do in preparation to sell your business, which can increase the value of your business.
Why are you selling your small business?
Any potential buyer will want to know why you are choosing to sell your business. Common reasons for selling a small business can include retirement, illness, boredom or becoming overworked.
It can be hard to sell a small business that is not profitable. You can increase the chances of selling your business quickly by showing increasing profits, creating a strong loyal customer base or securing a contract that lasts several years. Even if it is not profitable, if you can prove that the business has the potential to grow, you could still find a buyer.
When is the best time to sell your small business?
It is important to be prepared to sell your business. Giving yourself a year or two to prepare will allow you time to improve your financial records, business structure and operations and increase the customer base to make the business more profitable and attractive to buyers.
If you sell your business when sales are declining you are unlikely to be able to make a large profit from your sale. Increasing marketing activity in preparation to sell your business will enable the business to grow its customer base and increase sales, which will increase the attractiveness of the sale to potential buyers.
Improving the business operations will also allow the business to continue running smoothly throughout the transition.
Prepare business documents for the sale
You should work with an accountant to present clean financial statements and tax returns for the last 3-5 years to present to the buyer.
You should also create a list of contacts for supplies and sales. It would also be useful for the buyer to be given a manual or breakdown of how the business functions.
How much is your small business worth?
Typically, a small business is valued between three to six times you current cash flow. This is a starting point, but is not very accurate. To get an accurate valuation of your business, it is important to use a business appraiser who will charge a set fee for a valuation.
The appraiser will create a detailed review for the valuation that can be used to add to the credibility of the asking price.
The review typically considers sales, inventories and assets that will be sold with the business as well as outstanding debts in order to determine the threats and business opportunities. Industry trends, market demand and location will also be considered.
Should you use a broker to sell your business
Selling your business yourself means you do not need to pay any broker fees. Many small business owners choose to sell their business to a friend, family member or current employee, which means that they do not need a broker.
However, if you do not have a particular buyer in mind, using a broker will save you time and can help you to negotiate the sale price as the broker will get commission on the final value.
It is important that you consider several brokers and find one that is passionate about your business and knowledgeable about the industry. Typically, a broker will do their own valuation, you need to ensure that the valuation is realistic otherwise it is unlikely you will receive any offers.
Even if you do have a broker, it is likely that you will need to promote the sale yourself as well to get more potential buyers. You also have an advantage as you already have relationships with people in your industry who may be interested in the sale.
How long does it take to sell a small business?
Typically it takes 6 months to sell a small business.* It can be challenging to find the right buyer.
It is important to advertise the sale widely to attract the most buyers. The initial business sale could fail, so you should select two or three potential buyers and stay in contact with them regularly and answer any questions they have promptly. Your business valuation price should allow you some room to negotiate with buyers and any agreements with the buyer should be done in writing.
The buyer will want to review all legal, accounting, tax, banking and real estate contracts before buying. This can be a lengthy process, as they will also look into your customer base and any environmental or legal issues.
What are you going to do with the profits from you business sale?
Have you considered how much profit you will be making from your business sale? You should use an independent business valuation to calculate how much profit you could make.
You can outline your personal financial goals and determine how you can use the profits to achieve these goals. There are likely to be tax implications if you make a large profit. At Four Wealth Management, we can work with you to determine the most tax-efficient way to invest the profits to help you achieve your financial goals quicker.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation and reliefs from taxation can change at anytime. The value of any tax reliefs depends on individual circumstances.
*Inc.com ‘How Long It Actually Takes to Sell a Small Business’, 2018