Selling Your Business? Here’s Some Food for Thought

When a business is no longer meaningful or profitable for you, it’s probably time to move on. When a business becomes so profitable that it could command a huge sale price, it’s probably time to sell. But in either situation, do you know how to maximize your return?

An Introductory Guide to Selling Your Small Business

Small businesses change hands much more frequently than most people realize. In 2017, the number of U.S. small businesses that sold rose by more than 26 percent from the previous year. By one count, there were 9,919 sales (up from 7,842 in 2016). The median sale price was also up 14 percent at $227,880. This was the second straight record-setting year in both of these statistical categories.

By all accounts, launching, growing, and selling a small business can be an effective way to build wealth and find professional fulfillment, but many people get stuck when it comes to executing the sale phase of this process. In order to help smooth over some of the friction in this area, let’s shine a light on some of the more important aspects of the sale:

1. Valuing Your Business

You’ll clearly need to spend some time thinking about the value of your business and how much you’ll be willing to take from potential buyers. And while you may have a rough number in your head, it ultimately comes down to a few key factors – including seller’s discretionary earnings (SDE), risk, terms of the sale, and your industry.

SDE is an especially important concept, since it’s the amount of cash flow that directly benefits the business owner. According to VR Business Brokers of Charlotte, SDE is calculated using six key categories: (1) Profit or Loss as Reported, (2) Owner’s Salary, (3) Discretionary Expenses, (4) Non-Recurring Expenses, and (5) Non-Cash Expenses Including Depreciation and Amortization.

With a business broker on your side, you can come up with a much more accurate and realistic number. Don’t neglect this all-important step in the sale process.

2. Finding the Right Buyer

In the majority of cases, small business transactions are paid for by third-party loans. While this is totally normal, you have to be aware of the fact that many deals fall through because sellers enter into transactions with buyers who can’t secure the appropriate financing.

Never get too excited or emotionally attached when you get an offer. Be sure you always pre-qualify your buyers and do some due diligence to ensure they have the appropriate financial resources or financing to complete the transaction. (And assuming that you care about the future of the business, you also want to research the individual to make sure they have the potential to succeed with the company.)

3. Reducing Risk

It’s not as simple as agreeing on a purchase price and handing off the business. There are a host of legal considerations that come into play, including the all-important purchase agreement.

“This comprehensive document—typically 25 to 50 pages long—will consist of exhibits such as noncompete agreements, asset listings, employee agreements and guidelines for the use of website domain names,” entrepreneur Deborah L. Cohen writes. “It does not account for the sale of any stock.”

When drafting up the purchase agreement, it’s in your best interest to eliminate as much future risk as possible. You’ll want to absolve all responsibility and obligations as quickly as possible.

4. Smooth Sailing

It’s fairly common for a business deal to require the prior owner to remain in some sort of advisor capacity for 12 to 18 months after the sale. This is to encourage a smooth transition from the previous regime to the current one. Just make sure there’s a finite end date regarding the official end of the relationship.

Taking the Next Step

No matter the size of the check someone else is willing to cut you, selling your business is incredibly difficult. You’ve poured your blood, sweat, and tears into it for a number of years and now must make the hard choice to move on and let someone else take over the reins. But just because it’s hard on your emotions, doesn’t mean it’s the wrong choice. There’s immense value in selling a business and choosing to explore a new path.

Are you ready to explore your options?

This article does not necessarily reflect the opinions of the editors or management of EconoTimes