According to online business marketplace BizBuySell, the average sale price for small businesses sold in the third quarter of 2013 was $180,000—up 2.9 percent from the same time in 2012.
Additionally, BizBuySell reports that the number of small-business transactions that closed in 2013 enjoyed a whopping 41.7 percent increase compared to the same period in 2012. Couple those stats with current low-interest rates for borrowing, and it may seem like the prime time to sell your small business.
But even with this good news, there are questions to ask before posting “for sale” ads: Do I need a broker? Do I need a marketing plan? How do I value my business? Will I need to personally finance the sale? How can I minimize taxes? Should I be involved in the business post sale? What are the potential deal-breakers to a sale?
Bob House, General Manager of BizBuySell, answered these questions and posed a few more, many of which can be answered by reading BizBuySell’s free 100-page Guide to Selling Your Small Business, available as a download from the company’s site.
BizBuySell tracked nearly 2,000 completed sales of small businesses in the first quarter of 2014, and House is bullish regarding the small-business environment.
“Small business is the core of this country,” House says. “It’s the engine that drives economic growth. There’s certainly some consolidation and pressure being applied by corporate big-box stores, but there’s still tons of opportunity for main street mom-and-pops, or new franchise locations. Small business is very strong.”
Here are House’s seven tips to help guide you in making your small business for sale.
1. Find the Best Time to Sell (Know Thyself).
“A lot of small-business owners don’t think about their exit strategy,” House asserts. “They sometimes sell too late. Plan your exit. Get your books in order and make sure your business is in great shape so it’s fully saleable. Make sure you’ve done the necessary capital improvements so it will sell. You want to know market conditions, and the supply that is on the market. Is there a glut of supply or not enough demand? That would indicate whether it’s a good time to sell. What are you going to do next? Are you really ready to sell or retire? What are your personal motivations?”
2. Hire a Broker.
“A broker will know all the areas to market your business in the local area,” House explains. “They will help you prepare and organize all the documentation needed, how to properly list and market your business, and—more than anything—they will be the buffer between you and potential buyers. That will allow you to continue to run your business while the broker does the prequalification and hopefully finds a buyer. A lot of brokers operate out of a particular region, but with the Internet and the global economy, your buyers are really from all over.”
3. Understand a Broker’s Fees.
“Typically,” House says, “the standard rule of thumb for the broker is 10 percent of the sale. There are certain minimums that might cost more than 10 percent, and for bigger deals, you will pay less than that. It’s on a brokerage-by-brokerage, firm-by-firm basis.”
4. Make a Plan. Create a Sales Package.
“The package consists of the various documents you will need during the process,” says House. “You will a need an NDA [nondisclosure agreement] from the buyer. You don’t want critical information getting out to your competitors or suppliers or employees who could get skittish. You can guarantee that by having the buyer sign an NDA, where they promise not to share this information with anybody.
“You’ll want to prequalify the buyer; you’ll need their financial statement so you know this person is a serious candidate. You’ll want an executive summary or review of your business: the selling-memo summary, and a more detailed profile describing the business that is referred to in the selling memo. It’s an overview that lists key features, competition in the area, and employees, written in bullet points or paragraph form.”
5. Get a Financial Evaluation.
“A professional appraiser creates an evaluation of your business; brokers do that as well,” House offers. “Main-street-type businesses typically sell for one to four times their earnings. On our website, we pull together sales reports for every quarter, which we call Insight Reports. They list median asking prices, median sales prices, multiple sales prices, and cash flow. To get a ballpark of your business’s worth, [compare] your cash flow and your revenue. Your broker can estimate your company’s worth, but a professional appraiser will compile the most accurate info.”
6. Minimize Taxes.
“By offering seller financing and spreading payments out over multiple years, it’s possible to at least deflect the tax impact,” House advises. “And by offering a payout arrangement, you can spread your sales price over multiple years and minimize the tax impact in any given year versus taking a lump-sum payout.”
7. Avoid These Deal-Breakers.
“Financing is always a deal-breaker,” House says, “including the ability of the buyer to secure financing or the insistence of the seller to not offer buyer financing. Most sellers want to get out and get their money, but very rarely does that happen. Buyers want the seller to have some skin in the game. The seller should provide training and support to create a good transition with the buyer, who will then feel confident that this is an ongoing business that will endure.
“Banks often want to see a note that says the seller agrees to finance a portion of the purchase price. It could be an earn-out that pays a percentage of profits or a straight loan with a set interest rate. If you insist on all cash, you won’t maximize your return. You’ll actually get a higher return and a better sale price by offering financing.”