All things have a life cycle. Not only animate things, but inanimate things such as businesses. When we start a business we expect it to go on forever. Focusing on how we will end business ownership should not occupy our daily concerns, but anyone planning a successful transition to another endeavor or retirement should have some clear goals set.
You created a business or purchased one that someone else started in order to provide a service that was in demand. Somewhere along the way you built an organization with dedicated employees and loyal customers. As you reflect on your long-term accomplishments, what is the value of these accomplishments. The short answer is what someone else thinks they are worth. The purpose of this article is to help you maximize that net worth by looking at the significant steps leading up to that important decision to sell the business.
Whether or not you plan ahead for the time to sell your business, it will still be sold. If you simply quit performing the service, competitors will fill the demand void left by you. You will not enjoy any going out of business rewards in this case. In the event a family member would like to take over the business, there should be a clear plan of how that will work out. In all cases, a written plan is best.
Should the decision to sell the business to a stranger be your choice, it is best to engage a professional to assist in the process. A business broker, who has developed the skill to advise you how to go about the sale and then accomplish the objective for you, is a valued resource.
The most important factor is knowing the answer to the question, what am I going to do after I sell my business?
OBJECTIVES OF THE SALE. Once you know what you are going to do after the sale, you will have a guide toward how much time a transition out of the business will take and how much cash is required to obtain your short- and long-term objectives.
Typically, financials drive this aspect of the sale decision. Whether you want to pass the business on to family members, someone in management or to an outside buyer, it is best to have the business valued. This will enable you to plan marketing and tax strategies to maximize what you will keep after the sale.
VALUES OF THE BUSINESS. Most business owners do not know what their businesses are worth unless they have been actively acquiring add-on operations. It is recommended that you talk with your accountant or business broker for valuation purposes. Beyond the theoretical value, the person should have vast marketing resources at his or her disposal to accurately advise proper valuation for your business. They should also have the capacity to prepare a valuation report examining the various elements of your business.
LEVERAGE OF ASSETS. The valuation eliminates uncertainties about what you should ask for the business. This eliminates some arbitrary, ‘Let’s set a figure and see if anybody will pay it,’ approach that could alter your selling timetable.
Typically, a valuation expert uses three to five years of financial history to derive a value. Evaluating a business also involves looking at and analyzing a balance sheet of assets and liabilities. The quality of the assets determines, in part, the real market value of the hard assets. The collectability of accounts receivable will impact cash flow to the seller in an asset sale. The physical count of all inventories should be accurately reported and real estate carried on the books needs to be evaluated against current market comparables. An opinion about the fair market value for all the machinery and equipment is helpful, and liabilities will have to be settled and paid off prior to or at closing, unless otherwise negotiated in the sale contract. Occasionally, some buyers assume existing debts and leases.
Several analytical methods applied to the income statement figures will derive multiple valuation amounts. Taken together with the balance sheet analysis, the valuation expert will offer an opinion about the worth of your business. Upon deciding what the business is worth, the decision to proceed with exposing the business for sale or working it for a couple more years needs to be made.
Often after the valuation is complete, owners decide they cannot maintain their lifestyle with the proceeds after capital gains and personal taxes and choose to work the business a few more years.
FORMAL HELP. Should the valuation process confirm that now is the time to sell, hire a professional specializing in selling businesses. (If you cannot find any business brokers in your immediate area, contact the International Business Brokers Association at 703/437-7476.) This broker will assemble a marketing package displaying your business in the best light and will screen curious from serious buyers for introduction and a tour of the business operation.
Business owners that try to sell their own companies do not understand the overall objective of the buyer and how to structure a balanced transaction that is a win-win situation, whereas the business broker understands both parties’ goals.
PREPARE A MARKETING PACKAGE. Everyone knows that the presentation of what you are interested in purchasing is important in order to get serious attention. Selling all of the assets and goodwill of business is no different in that regard.
Most buyers’ first impression occurs when reviewing a business opportunity presentation package, including background information about the company, future growth plans, marketing data and financial history. The operations and key management will be profiled, demonstrating the stability of the business. Major equipment lists and real estate descriptions identify what hard assets are being purchased. In addition, it is customary to present a one-page financial summary highlighting sales, profits and seller’s discretionary cash flow from the last three to five years.
The information package should profile the anticipated buyer’s downpayment requirements, as well as whether the seller will carry back any financing. Pictures of the facilities and equipment are helpful. If you have snapshots of complete landscape projects, include those to demonstrate the talents of your staff, adding to the perceived goodwill value.
INTRODUCE THE BUYER. Buyers fall into a certain pattern by how they make the approach and how they respond to when asked certain qualification questions. A broker knows how to handle the confidentiality of exposing your business in a manner that will not jeopardize customers, employees and competitors becoming aware that the business is for sale. Some of the sensitive questions that need to be asked about the financial qualifications often screen those who can actually accomplish the acquisition.
A buyer knows what their acquisition limitations are and has good business advisors. The first thing a seller should want to know is what basic business knowledge along with lawn and landscape experience the buyer has. Some people come from a different industry and succeed without any initial technical knowledge, but they have a good business background. You need to know if they have sufficient cash funds to handle the transaction, with or without a bank.
NEGOTIATIONS. Once it is obvious that a buyer and seller have hit it off during a tour of the business and the buyer wants to prepare an offer, the negotiations begin. This is the most critical phase, putting a transaction proposal together and seeing that it stays together all the way to closing.
As you know, there is no perfect business. Your company may have some warts. A buyer may hurt the seller’s feelings by pointing out those warts in his or her approach to position for negotiations. A business broker can deflect these comments, shining a bright light on the positive attributes of the business and maintaining an objective view, putting all positives and negatives in their proper context.
This is where brokers earn their fee – with the knowledge of valuing businesses, any comments or issues that the buyer uses to devalue the business can be buffered with countering factors justifying the original asking price. A business owner trying to negotiate his or her own deal cannot remain objective about critical analysis of the operation they have lived with for many years.
CLOSING TH DEAL. This is the easiest phase, assuming everyone has concluded his or her work. We prefer that all due diligence work be fully reviewed and approved by those responsible one week prior to the scheduled closing. The closing event should be a joyous activity where the buyer brings the funds for the purchase and the seller brings the keys for the operation.
The author is director of mergers and acquisitions with Anthony Wayne Business Exchange, Fort Wayne, Ind. He can be reached at 219/485-1990.
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