Preparing To Sell Your Small Business: 5 Simple Steps
So, you’re thinking about selling your business? It’s not a bad idea.
According to BizBuySell’s insight report, more than 8,000 small businesses were acquired between 2021 and 2022, and the numbers are rising!
But don’t rush to get yours on the market too quickly. Selling your small business will require as much time and preparation as any good business decision. Get started today with these five simple steps.
1. Ask Yourself: Why Now?
It may be clear to you why now is the right time to sell your small business, but your potential buyer will want to know, too. Owners sell for any of the following reasons: retirement, becoming overworked, disputes between partners, and even lack of interest.
Sometimes, business owners consider selling when it’s not profitable. Beware the temptation—this can make it extremely difficult to attract potential buyers. For best results, “bulk up” your business by increasing profits, developing a solid customer base, and acquiring significant contracts.
2. Get Your Financials Squeaky Clean
When it comes to your financials, potential buyers will expect transparency. They’ll want to see clean financial statements, tax returns, and records of income for at least the past three years. Preparing all this information can take a while, so start cleaning up your financials a year—or even two—before selling.
In addition, avoid accounting practices that could derail a sale before it even has a chance. One of the most prominent “no-no’s” includes keeping family assets (cars, boats, etc.) on the books. If you’re not sure of the pitfalls, consider working with an accountant who can help you avoid balance sheet red flags that might scare away potential buyers.
3. It’s Time For A Business Valuation
Putting a price tag on your business can be difficult if you’re doing it alone because bias can quickly take over. Work with a business appraiser to get the most accurate picture of what your small business is worth. The appraiser’s valuation will include:
- a detailed review that covers everything from sales/receivables to assets;
- outstanding debts; and
- potential business threats and opportunities.
There are a lot of variables that can affect the value of your small business—market demand, industry trends, and location, to name a few. As a very general starting point, a small business is typically worth three to six times its annual cash flow.
4. Is A Broker Right For You?
There are benefits to selling the business yourself. For one, you don’t have to pay a broker’s commission. And if you’re selling to a trusted employee or family member, a broker is usually unnecessary.
But in most cases, a broker can play a huge role in helping you sell your small business at an attractive price. They’ll often perform the business valuation themselves and present a prospectus to a more extensive network of potential buyers than you could reach on your own. And keep in mind that a broker will want to maximize their commission by maximizing your sale!
If you’re bringing in less than $5 million in annual revenue, a broker will typically charge a commission between five and ten percent of the sale.
5. Locating A Buyer
This part involves the most nail-biting and requires the most patience. According to SCORE, a nonprofit association for entrepreneurs and partners of the U.S. Small Business Administration, a typical business sale can take anywhere from six months to two years.
One tried-and-true method for attracting potential buyers is through advertising. You’ll also want to let your networks know you’re planning to sell. Don’t rule out existing customers as potential buyers, either. They may know your business almost as intimately as you do.
Once you’ve secured prospects, maintain relationships with at least two or three of them as a backup in case the initial deal falls through. Ensure potential buyers pre-qualify for financing before giving out information, and work with an accountant or lawyer if you plan to finance the sale.
When it comes to negotiating, you can allow a little wiggle room—but stand firm on a reasonable price that considers the company’s future worth. And most important of all: put any agreements in writing. Have potential buyers sign a confidentiality agreement to protect your information. You may also be required to enter into a non-compete agreement.
So, You’re Still Thinking About Selling?
Now that you know more about the process, you can confidently make that decision to sell your small business. Good luck!