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Selling a business in the USA

If you’re thinking of selling your business, you may be looking for some help. That’s why we’ve put together a series of guides to walk you through the process.

Our guides will help you decide if now is the right time to sell and how you can get your business into shape before you do. We’ll also discuss the process of valuing your business and how to negotiate the best deal.

When is the Right Time to Sell My Business?

Hanging up a ‘going out of business’ sign is not something you want to do. You have probably poured years of hard work into your business. But selling is not a sign of failure. Whether it’s struggling or running smoothly, preparing your business for sale is an intelligent way to run it.

Most advisors recommend formulating an exit strategy before you even start a business.

The exit strategy is a strategic plan for how you will eventually cash out or devolve yourself of ownership. Owning and running a business forever is not common. Understandably, selling it when you have achieved your objectives is the most common strategy entrepreneurs pursue.

While planning when and how you’ll sell your business is ideal, even a successful business may unexpectedly sell due to unforeseen problems or disagreements among business partners.

You could receive an unsolicited offer from another competitor. Or you might realize that the current economic climate is advantageous to sell.

Five reasons it might be time to sell your business:

1. Your business performance is declining

One of the critical factors here is debt. Is your business falling deeper into debt each month? If you are borrowing money to keep your business afloat, it might be time to seek alternatives.

In most businesses, if the existing liabilities exceed 200% of the current assets, it is too difficult to recover. However, finding a buyer with resources to inject cash flow into the business could be essential in sustaining its performance.  Alternatively, merging with a larger company or selling to a strategic buyer could solve staff, funding, or inventory issues. Don’t delay the decision and allow your business to lose money or collapse.

Kevin Ryan, a serial entrepreneur, and founder of Gilt tells Forbes:

“If your company is not getting the traction it needs to be really successful, the faster you can move on, the better for everyone involved.”

Right time selling a business

2. Your passion for the business is starting to fade

Perhaps you were successful in the past, but now you struggle to generate new ideas that will keep the business flourishing. This could indicate that it is time to sell.

Ask yourself these questions:

  • Am I passionate about this business?
  • Is there something else I would rather be doing?
  • Am I overworked?
  • Is my business model flawed?
  • Do I need a vacation? 

Based on your answers, you should be able to determine your next steps.  Whether that’s taking a short break, restructuring your company and seeking support, or selling it to someone else. 

3. An unforeseen circumstance has affected your business

Situations such as divorce, death or the dissolution of a partnership can force an involuntary sale. In these cases, you’ll need to do what you can to make the best of a bad situation. 

4. You receive an offer you can’t refuse

You weren’t planning to sell your business, but you may receive an offer that is generous, and you don’t want to ignore. Take time to do your due diligence and make sure the deal is as good as it seems. 

5. Your business is profitable

Buyers will be attracted to consistent profit and upward sales trends, especially if it exceeds three years. If the valuation of your business is high, it could be a suitable time to cash out. 

Deciding to sell your company is a big step, and it is not a quick process. It usually takes between six months and a year to sell a business, so start planning for the deal much earlier.

Of course, most entrepreneurs have a hard time letting go of the business they built. It is up to you to decide whether this is the right moment to exit.

Should You Sell on Your Own or Use a Broker?

If you’re planning to sell your business, who should sell it? You, a broker, or an associate? How do you make that call? That depends on the circumstances. Whether you sell the business on your own or employ professional assistance, you’ll always be engaged in the process at some level. 

Owners selling businesses with revenues from $500,000 to $25 million generally choose one of these options:

1. Selling the business on your own

To sell a business on your own, you’ll need to have experience doing it. You’ll need to be comfortable with all the steps, keep your business running simultaneously and achieve your desired outcome. If the business’s appeal is limited to buyer candidates you are familiar with (competitors or financial firms), you may want to consider selling it yourself. In this case, you’ll make the initial approach and use the company’s accountant and attorney to draft financial and legal documents.

Choose right broker

2. Current service providers

Occasionally, an owner's current service provider (like an accountant or attorney) knows a potential buyer. The owner or service provider may take the lead in contacting the buyer, managing due diligence, negotiating, and preparing financial and legal documents.

The business owner will need to consider whether they can keep the process confidential from employees, clients, and competitors and whether they have time to execute the tasks involved to close the transaction.  

3. Using a broker

Local or specialty brokers can bring substantial value to the selling process if they are involved in the industry and have sold similar companies. Brokers can advertise the business for sale on their database of pre-qualified buyers. They can take responsibility for complex tasks, but their connections with buyers can be limited if they do not work with other brokers.

By interviewing business brokers, you will learn their unique capabilities and qualities. Good brokers bring a combination of qualities to the process, including knowledge of the marketplace, databases of suitable buyers, proven track records, sources of buyer financing, and relationships with other professionals who can support securing the sale.

Other questions and points to consider

  • How much are you willing to pay for the services of a business broker?
  • Will you feel a lack of control over the process if you are used to doing everything yourself?
  • A broker may pressure you to accept a contract you're not happy with.
  • A broker may pressure you to accept a lower price to get their fee, which is usually a percentage of the sale price, rather than risking the deal falling through.
  • How many clients is the broker currently working with? Do they have time to represent your business correctly?  

How to Get Your Business in Top Shape to Sell

Your business needs to be in great shape if you want to sell it. Consider how your company will look under the microscope of potential buyers. If you see potential flaws, make sure you rectify them so that once your ‘for sale’ sign is up, you can attract the right buyers and attain the highest price.

Here are some top tips to get your business in shape to sell:

1. Plan your exit strategy

What are your motivations for selling your business? Business owners who are selling because they want to pursue another opportunity or are seeking a lifestyle change can usually take the time to develop a strategic plan. This includes developing a timeline and goals.

Don’t wait until you are ready to retire or can no longer manage the business’s operations. If you need to sell under distressed conditions such as illness or old age, you could risk being taken advantage of by ruthless buyers and intermediaries.  

2. Get your books in order

When selling a business, it is advisable to get an audit for the past few years. This can be a costly investment, but it is worth it as it demonstrates your business’s profit history to potential buyers.

Make sure that you pay all your taxes, and if you have any lawsuits, settle them. Continue to keep your records up to date, and don’t let performance deteriorate in the final year or months of your leadership. 

3. Spring clean

This is an opportunity to clean up your business and get things in order. This preparation will provide a positive first impression to potential buyers.

Focus on repairing your facility and replacing equipment. Similar to the process of selling a house, ensure you do not present a neglected or unappealing business.

4. Determine what you are selling

Selling a business is not just about physical inventory and space. Your business’s history of profitability, competitive advantage, customer base, growth opportunities, brand loyalty, intellectual property rights, licenses and issued patents are all significantly valuable.

5. Know what your business is worth

Consider the current market, economic trends, and research what similar businesses have recently sold for.

It’s essential to get a formal valuation from a professional appraiser, so you know what to offer a potential buyer. A realistic business valuation will be favored by potential buyers and could prevent future legal trouble.

Use this valuation to assist in setting your asking price. Figuring out the formula can be challenging. If you set the price too low, you can lose out on opportunities. Setting the price too high can deter investors and potential buyers.

Selling a business is a lengthy process that requires careful preparation even before you advertise the sale, so let’s have a look at the valuation process.

A quick guide to business valuation

Buying or selling a business will likely be the largest financial transaction you take on. Settling on the right price is crucial for both sides of the transaction.

Guide to evaluate business

To accomplish these goals, both parties need to arrive at a realistic valuation for the business. We’ll offer basic guidelines and tips to help you do just that. You can find detailed valuation methods, tools, and further advice in our valuation guide.

Familiarizing yourself with the valuation process is essential. It will help you understand a buyer’s mindset, and it will help you maximize the value of your business by learning and preparing it for the selling process.

What is a business valuation?

Business valuation is an umbrella term covering numerous methods that place a dollar figure on a company’s total quantifiable and unquantifiable value.  Since both tangible assets, intangible assets and liabilities are included in the transaction; a business valuation is not a simple, straightforward equation. Calculating the figure is a small part of the whole process.

To accommodate these factors, you can use numerous methods. Some are more appropriate to sectors or company types. So, let’s dive into some basic guidelines and methods:

Some Methods for Business Valuation

Asset-based valuation

Basing your valuation on your assets can give you an overview of your business’s value.

You’ll need to consider both tangible and intangible assets and their depreciation rates. To use this method, add up the value of your assets and subtract any liabilities. Tangible assets can be tools, equipment, and property. There are parts of your business that you can’t quantify but that still play a significant role in the value of your business. These intangible sources, or goodwill, include:

  • Customer loyalty
  • Brand recognition
  • Staff performance
  • Customer lists
  • Management stability
  • Intellectual property ownership
  • Reputation 
  • Business operation procedures

The figures in your accounts are a good starting point, but financial advisors are obliged to be prudent: they must use the minimum the assets could be sold for, so be realistic when you assess the value of your assets.

Industry-based valuation

This method uses a formula to estimate the value of the business through pricing guidelines based on its industry. While this method gains points for simplicity, a seller must keep in mind that each business has unique qualities that can raise or lower these set values even within the same industry.

Therefore, industry-based valuations function as a ballpark estimate in the beginning stages of the valuation process. The exception may be a transaction with extremely tight time constraints or a low price point in which neither the buyer nor the seller feels a more thorough valuation is worth the time, effort, or expense.

Comparable business-based valuation

With the availability to research hundreds of businesses listed for sale online, owners can base their valuation on similar businesses. This is an opportunity to source free data on businesses currently for sale or recently sold.

However, it’s unlikely that a truly comparable business will be found because of the natural difference between every business. Especially one with the same number of employees, same primary revenue, same market share, and in the same part of the country.

Asset liquidation-based valuation

A variation of the asset-based method would determine the liquidation cost of the business. In this method, the value of the business would be based on the estimated cost of any equipment, inventory, or receivables on the open market if they were sold immediately.

It is used for companies with considerable tangible assets, such as real estate properties. This approach can be misleading if you inflate the book value of assets (like buildings and equipment).

This method can be used for a business on the brink of failure due to bankruptcy or another form of collapse. Successful business owners may use this method when buying out failing competitors, with the value being the competitor’s existing stock, equipment, facilities, and customer list.

Entry/startup cost

This method involves gauging how much money it would take to build the business from scratch and reach its current size, status, and revenues. Consider the time and resources it takes to train staff, purchase premises and equipment, and establish branding and marketing.

This method should not be used on its own, as it does not consider intangible assets.

Earnings ratio valuation

Discretionary income-based valuation

Another simple but effective way of valuing a small business involves determining the current owner’s discretionary income. 

It can offer valuable insights into what a buyer can expect to earn monthly or yearly, assuming no substantial changes are made to the company’s current situation). It can indicate what their ROI (return on investment) is likely to be and how long it will take to realize that return.

To determine discretionary income, take the amount the owner has declared on their income tax, add in any discretionary expenses such as automobile expenses, travel expenses, salaries, interest costs for business loans and depreciation. 

Add those discretionary expenses back into the owner’s declared income and multiply the result by 1.5 to 2.5 to come up with the final value of the business.

The multiplier provides a significant range to negotiate the final price based on intangible items that the equation does not factor in, as described in previous methods.

This valuation method’s limitation is its assumption that the business will continue to operate unchanged after changing ownership. This assumption depends on how the company is currently set up and run. 

Price/earnings ratio valuation

The price/earnings (P/E) ratio is one of the most common business valuation methods and tends to be a go-to strategy for professionals. 

Analysts compare the values of companies quoted on the stock exchange, so sellers and buyers can both place confidence in its validity. A value is determined using this method by dividing the market value per share by the post-tax earnings per share. 

If the value of a single share on the stock market is $1.00 and the post-tax earnings per share are $.05, then the price/earnings ratio is 20. This will value the business at $.20 for each $.01 of current earnings. 

You could look at financial newspapers to gauge historical price/earnings ratios for companies in your sector and adjust them accordingly. The P/E ratio for a small, private company is around half of a listed company in the same industry. 

It isn’t easy to get comparable figures on other privately owned enterprises, as the details of the actual deal will remain confidential. Speculation in the trade press or clauses tying in the vendor can often inflate the exact figure.

It's not always appropriate for smaller, unlisted businesses as it only represents the value of established companies with a history of steady profit. 

A small, unquoted business can be valued between five and ten times its annual profit, depending on certain factors. A large, quoted company with good prospects can have a P/E ratio of over 20.

Regardless of the size or age of the business, you can get a rough range of the P/E ratio, making it a solid choice for most circumstances.

Discounted cash flow

Discounted cash flow (DCF) will help you estimate the value of an investment by calculating a business’s future cash flows. Simply put, DCF attempts to calculate the value of an investment today, by making assumptions of how much money it will accumulate in the future.

It’s appropriate for companies that have growth potential but lack hard assets and a financial track record. The most common example is a web-based start-up. The method deducts intangible criteria from projected cash flows or NPV (net present value).

Take the example of a company that makes a profit of $10k annually that will remain steady for the next ten years. $10k received in five years’ time is not worth the same as $10k received today. If the buyer received that $10k today, they could put it in a bank (assuming a 5% interest rate) and in five years’ time it would be worth $12,763. If you work backwards, the $10k received in five years' time is worth $7,835 today, based on the following discounted cash flow formula:

$10000/((1+5/100)^5) = $7835

$10k received in 10 years' time is worth $6,139 today:

$10000/((1+5/100)^10) = $6139

Adding all these figures together gives the buyer an idea of how much he or she should pay now to receive the returns from the business in the future. If the value arrived through DCF analysis is higher than the current investment cost, the opportunity may be a lucrative one. Unless you are familiar with DCF, we suggest seeking professional help if you choose this method.

Multiplier valuation by sales

Each industry has its own publications, business brokers and industry associations that can provide current multiples for your industry. The multiplier method uses the business’s gross sales multiplied by this multiple to reach a valuation.

For example, if gross sales are at $60,000 and the multiple is 0.4, the result will be a $24,000 business valuation. Remember that there are factors that can increase and decrease this multiple, so your valuation may not always be accurate. 

Some factors that can increase a valuation multiple:

  • Loyal customer base
  • Stable earnings
  • Goodwill
  • Your market industry

Some factors that can decrease a valuation multiple:

  • Unstable earnings
  • Reliance on owner
  • Small product or services offering

Multiplier valuation by profits

This method gets its multiple from the profits of a busines Because of this, small businesses will slot into the lower range of multiples while established companies will fall into a higher range. While this method may seem clear-cut, it is not always accurate as it does not consider current financial status or potential threats.

Of course, buyers and sellers can have very different ideas of what a business is worth, especially when the seller has an emotional attachment to the business. To avoid this, we recommend seeking professional assistance. 

Once you’re confident in the value of your business, it’s time to start thinking about how you’ll advertise it to attract buyers. Once you’ve found a buyer, we recommend you start preparing for due diligence: the buyer’s thorough examination of accounts, customer and supplier relationships and physical assets.

Boosting the value of your business before you sell it

To ensure the selling process goes smoothly, improving the value of your business is a crucial step. Here are some ways you can accomplish this:

Stay with the company for a fixed period

If you or your colleagues are a crucial ingredient to the company's success, buyers may offer a higher price if you are prepared to stay on as an employee or consultant for a fixed period.

This reduces disruption and smooths the transition to new owners. Alternately, buyers may offer to pay a second sum at the end of that period, but this is a risky route if they already own companies that are not entirely solvent.

Grow first

Whatever the sector, buyers tend to regard established businesses as more secure. Large organizations have more significant resources to weather any unforeseen economic storms. Buyers will pay more for this reliability.

If you’re planning to sell, look at your current situation and see if it is possible (and profitable) to merge with or acquire one or more companies before putting the business on the market.

Patents, trademarks, and copyrights

Businesses can have advantages that will increase the security of their profits. For example, a business might have intellectual property rights over a particular manufacturing process, recipe, or marketing logo. Consider if Coca-Cola Co. went up for sale. Its value on the market would be more than the value of all its physical assets. Their secret recipe and brand recognition are worth more than all their factories and bottling plants combined.

Different buyer types

The value of a business will also depend on the nature of the buyer. Buyers will generally fall into two categories: financial and strategic.

A financial buyer, such as a venture capitalist, will typically look at your business in isolation, analyze the viability of its profits, and examine whether he could increase them by streamlining the company.

On the other hand, a strategic buyer will likely be in the same or a related sector: a direct competitor, a supplier or vendor, or the owner of a related business. 

Combining your business with theirs might enable them to cut costs that would not be possible for a financial buyer. They could centralize the sales and marketing function, for example. This type of buyer is also likely to have a greater understanding of the sector, and consequently, your business model.

While strategic buyers tend to offer higher sums, they can be few and far between.

Approaches from competitors can also be dangerous. Do you want to divulge the mechanics of your business to a potential buyer, only for them to terminate the sale and remain a competitor? They would know your weak points, which they could exploit. They could also replicate your strengths.

The best option for a motivated business owner looking to sell their business is to get professional help. Business valuation professionals will look at each unique company’s situation to determine which valuation method will be the most effective.

With suitable valuation techniques and investments in place, you can boost your company’s value before putting it on the market.  

Due diligence

Finances

Financial factors will be vital to the value of your business. They include your past, current and projected profits and cash flow, and a need for future capital investment.

Tip: Review all your current holdings, including equipment, supplies, facilities, licenses, and other areas you think are essential. Ask yourself if you’ll need to upgrade or replace them. 

Intangible factors

These are harder to measure than concrete factors, but they’re still capable of influencing your profitability.

Tip: Consider these questions: do you hold patents that can prevent competition? Do you have a process or methodology that can be trademarked? Think about your customer relationships, your company’s unique selling proposition, and the strength of your workforce.

Assets and liabilities

Your company’s assets and liabilities play a considerable role in determining its value. Anything you can do to increase the value of your assets and lessen your liabilities will have a positive impact on the business value.

Tip: Focus on debt reduction before putting your company on the market. Undertake ‘low hanging fruit’ investments to boost the value of your assets, such as inexpensive facility repairs and upgrades, renewal of equipment warranties or service contracts, and software upgrades.

 Staff

Your employees, including their achievements and experience, are important to the value of your business. Your contribution also adds value. Indicate whether the business depends on you, and if it will require your input in future.

Tip: Although it’s important to highlight your contribution, make sure your exit will not detriment the running of the business. This makes it easier for prospective buyers to envision themselves successfully filling your shoes. However, the business value can increase if you’re willing to play a consultative role during the transition period (unsalaried, of course).

The Market

No matter how well your business is doing, the condition of the broader market will affect its value and how likely it is to sell. Market factors include the state of the economy, inflation, and interest rates.

If there are similar businesses for sale, this could impact the value of your business. Likewise, if there are high demands from potential purchasers, your business value can increase.

Tip: If you’re not being forced to sell, and you can choose your exit time, spend at least two years investigating the market.

There are multiple factors to consider when selling your business, and it can be overwhelming. To alleviate some of this stress, rely on local valuation professionals, especially when handling the more complex valuation methods.

The Due Diligence Process When Selling Your Business

Mutual trust established during negotiations can easily collapse, so you’ll need to safely navigate the due diligence process. A buyer will conduct due diligence to confirm your sales pitch or identify any red flags, so be prepared to answer their questions and have supporting documentation. 

What you can expect during due diligence

An investigation into your business history and trends

The purchaser will want to look at sales targets, profit margins, overheads and working capital to identify consistency and areas for improvement. If there have been irregularities, like a downturn in numbers, a buyer will ask for explanations.

Talking to customers

The best way for a buyer to rate products and services is to talk to current customers. The buyer will also assess your relationship with customers, the impact a change in ownership may have, and gauge how much they’ll need you for a smooth transition.

Talking to suppliers

Due diligence will also uncover outstanding debts, how its suppliers perceive the business, how it compares to competitor’s supplier relationships, and if a change of ownership would impact any supplier agreements.

Negotiate sale

Investigating and comparing financials

Due diligence allows a potential buyer to check if sales forecasts and projections are realistic. Customer and supplier comments will be tallied against information supplied by the business. Balance sheets will be compared, and the buyer may request a comprehensive audit and assess whether any outstanding debts are manageable.

Talking to and auditing employees

A buyer will audit employees against any industry pay agreements. They will also check employee turnover against industry norms. Employees can be asked if they will stay or leave following a change of ownership. A buyer will also want to know which employees can help support a seamless transition.

Set up a digital due diligence folder

Create a digital folder containing documents related to your company and any requests made in the due diligence process. This online repository of information will support information flow in advance rather than prepare each piece on demand. A prospective buyer will also appreciate your professionalism and organization. Preparing ahead of time will encourage you to analyze the inner workings of your business before you sell, giving you time to make necessary adjustments.

A checklist of what buyers might request:

  • Organizational charts
  • Past financials and projections
  • Management reports
  • Stockholder communications
  • Customer and supplier agreements
  • Credit agreements and loan obligations
  • Partnership or joint venture agreements
  • Articles of incorporation
  • Shareholder arrangements
  • IP-related agreements
  • Government authorizations

Other customized documents you can include:

  • Customer acquisition channels
  • Case studies of key customers
  • A list of customers in your sales pipeline
  • A spreadsheet with your company’s key metrics: your revenue, users, growth rates, customer acquisition cost, lifetime value, etc.
  • A financial plan for the next three years

If due diligence proceeds smoothly, you can finalize the sale using the support of a solicitor with business sales expertise.

Negotiating the Sale of Your Business

Sellers generally desire all-cash transactions, but partial seller financing is necessary for middle-market company transactions. Sellers who demand all-cash deals might receive a lower purchase price than they would if the deal were structured differently. 

Although buyers may be able to pay all-cash at closing, they often want to structure a deal where the seller has left some portion of the price on the table, either in the form of a note or an earnout.

An earnout is a mechanism to provide payment based on future performance. If the business is represented realistically, there should be no problem with this type of payout.

For example, suppose a company had spent three years developing a new product and had just launched it at the time of a sale. An earnout could be structured to compensate the owner for the effort and expense of developing the new product when the sale of the new product materializes.

The terms of the deal are critical to both parties involved in the transaction. Most times, the buyers, sellers, and advisors agree with all the transaction terms, except for the price. Although the variance in price may seem to be a ‘deal killer’, the price gap can often be resolved so that both parties move forward to complete the transaction.

Listed below are some suggestions on how to negotiate the price gap:

Real estate

If the deal initially included the real estate, the seller might choose to rent the premises to the buyer rather than sell it. This will decrease the price of the transaction by the value of the real estate. The buyer might also choose to pay a higher rent to reduce the goodwill portion of the sale. The seller can also choose to retain title to specific machinery and equipment and lease it back to the buyer.

Option to buy

Initially, the buyer can acquire less than 100% of the company and have the option to buy the remaining interest in the future. For example, a buyer could purchase 70% of the seller's stock with an opportunity to acquire an additional 10% a year for three years based on a predetermined formula. 

The seller will enjoy 30% of the profits, plus a portion of earnings at the end of the period. The buyer will complete the transaction in a two-step process, making the purchase easier to accomplish. 

Different buyer types

Subsidiary

A subsidiary can be created for the fastest growing portion of the business being acquired. The buyer and seller can then share 50/50 of the business until the original transaction is paid off.

Royalty

A royalty can be structured based on revenue, gross margins, EBIT, or EBITDA. This is usually easier to structure than an earnout.

Assets

Certain assets, such as automobiles or non-business-related real estate, can be carved out of the sale to reduce the actual purchase price.

Although these suggestions will not solve all the pricing gap problems, they may lead the participants in the necessary direction to resolve them. 

The ability to structure successful transactions that satisfy both buyer and seller requires an immense amount of time, skill, experience, and, most of all - imagination.

Circumstances are different for every business for sale. Choose the option that is going to deliver an advantageous outcome. Once you’ve ensured that all your checklists are met, you’ll be ready to sell your business. This is a big step with many considerations. If you still have questions or concerns, just contact us and we’ll support you.

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