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Enhance
Your Chances of Selling Your Business
You
have been running your small business for some years and have
decided it’s time to get out sell the business and relax. Or
maybe you need capital and have decided that selling your
business is a good way to finance another business venture, pay
for college, or pay off a mortgage. The reasons for wanting to
sell a business vary greatly, but many of the potential pitfalls
and the techniques for making sure you get the price you want
are the same, regardless of why you are putting your business on
the auction block.
If
you are preparing to sell your business or you are considering
putting your business up for sale, follow the advice below to
enhance your likelihood of selling your business successfully.
Sell
for the right reasons
A
sale has to be done for the right reason in order to be
successful. Brokers say good reasons to sell include a desire to
move on to something else, divorce, retirement, or death of a
spouse.
Finances,
on the other hand, are not considered a positive motivation for
selling your business. When people want to use the proceeds to
pay off a mortgage, or when financial considerations are the
driving force for some other reason, the sale often does not
happen. If a sale motivated by money does go through, it often
takes a long time to sell, and frequently sells for a price
significantly lower than what the owner hoped.
‘When
people try to sell for financial reasons they are almost always
unrealistic about the worth of their company,” says Jim
Salvarakis, a lecturer on the topic of selling a business, and
president of the brokerage company Connecticut Business
investments, Inc. in Southport, CT. “Their price is not
related to the marketplace because they have doubled the worth
or more and the marketplace will just not net them that.”
It is
not news that many small business owners keep poor books and
records, and these record-keeping habits can be problematic when
a business is for sale. For example, in a cash-based business,
owners pocketing money instead of recording it on the books may
find themselves forced to sell a business based on what is
recorded, not what is actually made. This means that your
business could be worth much more than you will be able to get
for it.
To
avoid this trap, plan ahead and have at least one full year of
reported records before you try to sell. The latest 12-month
results are the primary factor when a buyer is evaluating a
business because purchasers are most concerned with what the
business is doing currently. However, 2 or 3 years reflecting
your full potential are preferable because they will help
reassure a buyer that your business is worth what you are
asking.
If you need to sell right away there are
other ways you can prove to a buyer that you are doing more
business than your books reveal. A buyer can evaluate your
consumption of supplies and products. For example, a potential
purchaser can look at a Laundromat’s water consumption or
pizza parlors flour purchases. There are a number of problems
with this route -- it takes more time; a buyer may not want to
dig for this information; opening up your business this way
means that the IRS may also get wind of the fact that you are
not reporting all of your income; and if you are not honest with
the IRS, a buyer may wonder if you’re being up front about the
business you are selling.
In manufacturing and service
businesses, the cash-off-the-books factor is not an issue
because their books and records tend to be in better shape and
income is documented. But there are other stumbling blocks.
Owners of these businesses tend to push tax benefits to the
limit and funnel a lot of personal expenses through the
business. This practice hurts when it is time to sell because it
makes a business appear as though it has more expenses than it
really does. Try as you might, you may not be able to convince a
buyer that these activities are not necessary for the business.
To avoid this problem, forgo perks for at least a year and keep
only business on the books. This will maximize the price you can
get for the business.
Helping
yourself to sell
Once the process is underway
and you have buyers interested in your small business, take some
steps to increase the likelihood that your business will sell.
Spruce up your business physically. Throw out garbage, take out
all boxes stacked in the office, straighten that crooked door,
paint the office, or whatever else is necessary to make your
small business sell. This is often overlooked because owners
don’t see a messy office or broken hinge anymore.
Before inviting buyers to
look at your office or store, try to look at it as someone would
see it for the first time. A messy office may indicate to some
people that a business is sloppily run, and a buyer’s first
impression is critical because emotional attachments are
important to selling the business. You want to do everything in
your power to help a buyer feel comfortable and able to overcome
financial fear of buying a business.
Help yourself as well by
being honest in all meetings with brokers or potential buyers.
When you are meeting with a broker and or a buyer, paint a
realistic picture of what your business is doing. A buyer or
broker will find out the truth eventually and trying to present
an overly rosy portrait is a big waste of time for everyone.
Unless you come across as honest and truthful, a buyer will not
believe what you say about the business.
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