By: Rayanna Anderson
Selling a business you have worked hard to build should never be a spur-of-the-moment decision. To maximize value, you may need to start planning years in advance. Before selling:
- Understand your business from the buyer’s perspective. Buyers want income from their investment; they won’t pay for potential, especially when cash flow will not cover a loan payment.
- Know the value of your business. A certified valuation is usually required and is well worth the price. With small businesses, an income approach taking past/projected cash flow into account will likely be used, especially when bank financing is the primary funding source. The “Business Reference Guide” by Tom West is a good source to check, but is no substitute for actual valuation.
- If you don’t like the current value, how can you increase it? Add cash to the bottom line by depreciating assets rather than expensing them; reduce working capital needs (assets minus liabilities) by lowering accounts receivable and inventory and increasing accounts payable; and don’t reduce net profit for three years prior to selling.
- Is there a best time to sell your business? Yes! When your financials are solid and your industry is going into a consolidation, it opens the market to get you the most money. Most buyers will require financing, so low interest rates and a competitive lending market are also important.
- Consider what your tax consequences will be. Have a post-sale financial plan that includes how you will invest the proceeds. Understand the tax consequences of the sale, and how you will finance any associated tax liabilities.
- How long will it take to sell? Most first buyers do not work out, and it typically takes nine to 12 months to close the deal.
- Is your business ready to sell? Make sure the financial side of your business is in order — books up to date and effective accounting system. Also, review your contracts and make sure any intellectual property (e.g. patents, trademarks, copyrights) are filed and in good standing.
- What potential problems should you disclose? Contingent liabilities, accounting and intellectual property issues, and ownership disagreements. Trust can be quickly destroyed and deals swiftly dissolved when such items are discovered during the due diligence process.
- When do you tell employees your business is for sale? Disclose this only when you are ready to market the potential sale. Generally, you will need to involve your accountant from the start. Be prepared to answer the question that will be on everyone’s mind — how will this affect me? It may be valuable to incentivize key employees to support the sale and transition.
- How will you fit into the business after the sale? It is not uncommon for a business owner to stay on in a consulting role for six to 12 months. This can increase the company’s value by reducing risk to the new owner and the bank, and could also be an additional source of income for you.
The sale of your business is an enormous and often emotional task. Nevertheless, the rewards of careful planning and execution can compensate you for the rest of your life, making your efforts well worth your time and energy.
Rayanna Anderson, MBA, is the Entrepreneurship Coordinator and Community Liaison for the Missouri State University’s College of Business. Anderson writes about issues from her 25 years of consulting with small businesses in Springfield and the state of Missouri. Email: RayannaAnderson@MissouriState.edu.
This article appeared in the April 22, 2017 edition of The News-Leader and can be accessed online here.