Baby boomers are leaving the workforce in droves. But a business owner who wants to retire cannot simply turn off the lights and head to the beach. Selling a company and getting fair value generally takes several years and careful planning.
Step One: Polish the apple.
Do not conduct a “Get me the heck out of here” sale. A buyer will not pay full value if it appears a seller is desperate. The seller should have a story that conveys a sensible reason for selling. Additionally:
- A business history should be prepared; financials and corporate books should be in perfect order.
- Three years of tax returns should be gathered.
- Documentation for IP, licenses and employment agreements should be made available.
- Computer systems should be modern and upgraded.
- Relatives or children not being productively employed should be let go.
- Work out lease extension options well in advance of the year in which the business is to be sold.
- Environmental issues are deal killers. Fix them!
- Dispose of dead inventory.
- Buyers want to see growth, so sellers should consider increasing advertising and promotion to boost revenues.
Step Two: Determine a reasonable price.
A crazy price hurts a seller’s credibility regarding his other representations about the business. Setting too high a price may slow the deal and cause a seller to miss the window of opportunity for selling in our cyclical economy. The price a buyer pays reflects a determination of discounted future earnings. To value a business where the owner is actively involved, one must determine what a potential buyer would have to pay someone to do the job of the owner. Thus, if an owner takes $100,000 out of a company annually and it would cost $75,000 to hire someone to do the owner’s job, then a buyer is purchasing a $25,000 stream of income (not $100,000) and his offer will flow from that number. With a realistic number in hand, to come up with an asking price:
- Apply any rule-of-thumb metrics used in the seller’s industry, such as a multiple of sales or cash flow.
- Look for comparable sales of similar businesses.
- Run a capitalization of income calculation, applying the appropriate cap rate for your industry.
- A third-party valuation may provide comfort and be worth the cost.
A seller should know how much seller-financing he is willing to provide. However, an all-cash deal at a lower price is usually better than being the bank. A buyer wants to ensure a smooth transition with customers, so a seller should steel himself to work in the business for 12 to 18 months. The shorter the time, the better.
Step Three: Determine logical potential buyers.
Determine potential buyers, such as competitors, key employees and private equity. With believable narrative in hand, reach out.
Step Four: Consider using a broker.
Business brokers not only have a book of possible buyers, but sometimes have banking connections. Thus, their 5% to 10% commission can be worth it. Do not be seduced by a broker claiming he can get you an unrealistic price. Interview several brokers before you hire one.
Step Five: Size up the buyer.
Determine the likelihood of the buyer securing financing before the deal is signed.
Finally, let an experienced business lawyer handle the purchase and sale agreement, not the broker.