One of the most challenging components of being a business broker is getting inventory that is solid and well prepared for sale. Unfortunately sellers generally do not think of selling or seek advice regarding selling until it is far too late. Here are 10 Questions sellers should ask themselves before selling their businesses:
1. IS MY BUSINESS READY TO SELL? You cant put all the stuff together needed to sell in just a couple of days. At a minimum I recommend at least 2 years of history. Which means you need to have 2 years of Tax returns that are filed. As it relates to these tax returns….in the business brokerage we have a saying “you cant beat Uncle Sam twice”. What that means is if you and your accountant got creative and mitigated your taxes don’t expect to get the benefit on the back side….and recognize that some of your tax planning actions will have a negative impact on your net gain after the sale (depreciation and amortization just to start).
2. HOW IS A BUYER GOING TO VALUE MY BUSINESS? There are generally 7 different methods of valuing a business. As a carry over from item 1 you need to understand these methods and what is an acceptable add back and what is not. Loading your business with tons of personal expenses may make your business look unprofitable to the non seasoned buyer (recognize that most buyers have never bought a business before).
3. WHO SHOULD BE ON MY TEAM WHEN I SELL? You should know who is best positioned to assist you in getting the best price. Be aware of all their skills, talents, and roles. Experience matters in this regard and its your money so make sure you interview, ask for referrals, and insure your team works together. Attorneys, Accountants, and Business Brokers are all important. Remember you get what you pay for.
4. IS THIS THE RIGHT TIME TO SELL? Many people wait till their business is on the decline to sell. They say “why should I sell I am making good money?” or they simply are overly optimistic ( a common trait of entrepreneurs) . Selling on the down side only puts you in a position to be leveraged. You eliminate any chance of bank financing and give the buyers the ability to leverage for better terms. Also you should recognize that there is a sophisticated market for small businesses that drives prices up and down just like the stock exchanges.
5. IS THE MARKET RIGHT? Certain businesses flow with other industries or economic trends. For example in 2008 and 2009 any business connected to the housing industry was very difficult to sell. You should consult active brokers who are in the market to get a solid assessment. Ask for comps…they exist!
6. CAN I COPE WITH THE CHANGES ON THE HORIZON? One of the hardest things I have to do is speak with business owners who have allowed their skills or their businesses internal processes to wane as technology has changed the way business is done. Business owners must continually keep up and invest or risk having their business value slip as a function of being outmoded and outdated.
7. CAN MY BUSINESS SURVIVE WITHOUT ME OR WITHOUT A KEY CUSTOMER? In the Army we used to train down so that each soldier knew the job and could do the job of the person up one and down one from their position. If YOU are the business you better change it or you create doubt and questions about the transfer ability of your business. In addition, if the loss of one customer can tip your business from positive profit to loss….you got a huge issue and you need to fix it today.
8.WILL YOU BE WILLING TO STAY? Business buyers want the seller to stay for training, customer transition and to assist in training staff. There is no way around this and it is going to be requested.
9.WHAT ARE POTENTIAL DEAL BREAKERS? What seems minor or normal conduct of business will not be to a seller. Speak with your a broker to go through all the various components of your business that may impact the sale. Things like software licensing, subcontractor relationships, labor / employee status (w2 or 1099) are all issues that when positioned in the context of a sale may cause issues.
10. WILL YOU CONSIDER ALTERNATIVES TO AN OUTRIGHT SALE? Financing of small business is some of the toughest of deals to get done. The agenda and paper position of the sellers, banks, and buyers are all variables that have to fall perfectly into place. Of all the deals done in a year less than 5% are done with bank financing.
If you want to sell your business you better prepare way ahead to improve those chances and even then your chances are slim. Creative financing and terms are a reality in small business sales and don’t let anyone tell you otherwise.
In addition you need to consult with your tax and legal team once you have been given a valuation on your business. The structure of the deal will mean everything in terms of your walk away ROI due to capital gains taxes.
Michael Shea PA