By Laura Babcock
Selling a business is complicated. You’ve put years of hard work into building up a company that is a significant part of your life. Maybe you also sunk a lot of cash into the business to help get it started and then again through all the rocky moments along the way.
Between your sweat equity and capital investment, you have an expectation of what your business is worth. So you want to sell. Cash out. Retire to Arizona or Florida. Never mind what your business tax returns show. You know what your business is worth. You deserve it! You’ve earned it!
Selling a business is also tricky because it can get emotional. This is your baby. Something you may have started from scratch and built into a thriving business. You’re proud of your accomplishments, and you should be. You expect compensation for what you’ve created.
But what happens when no one wants to buy your baby? You think, “No one sees my vision, understands my passion,” or you think they want an easy way into business ownership.
Have reasonable expectations
According to BizBuySell.com, only one in five of their business listings get sold. That either means there aren’t many people looking to buy a business, or there are a lot of sellers with unreasonable expectations (in other words, overpriced businesses for sale). I’ll put my money on the latter option.
Take Gerald for instance (all names have been changed). Gerald owned a paint store in a smallish town in southern Minnesota. He and his wife Evie owned and managed the store for thirty-plus years. Gerald had one key employee and would sometimes hire part-timers to fill in during busier times. The paint store had several customers who were regular clients, mostly painting contractors, who had done business with Gerald for years. Business was good. Life was good. Gerald and his wife owned the building that housed the paint store, they had put two sons through college, they vacationed in Florida, and they paid very little income tax.
But then Gerald and Evie had some serious health scares and decided it was time to sell the business. Neither of their sons wanted to take over so they contacted a business broker. They were excited. Gerald and Evie started looking into the cost of homes in Florida. They were sure the business was worth more than what a vacation home cost. Woo-hoo!
Then the broker asked to see inventory records and agreements with the paint supplier. He asked to see the deed on the building, financial statements for the last three years, and . . . ba-boom: tax returns.
Gerald asked if this was all necessary. Couldn’t they base a sales price off their annual revenue? Sales were good. Anyone could come in here, own the business, and make a decent living. Why did it have to be so complicated?
Now, in Gerald’s defense, he knew he wasn’t the best recordkeeper, so he used an outside bookkeeper. Problem was, Gerald never took the time to understand what she was keeping track of. The records were confusing, and as the broker found out, incomplete. As for taxes, Gerald’s tax preparer had for years suggested ways to minimize their tax liability by taking certain deductions. It was all legal, but it didn’t make the business look profitable.
The broker explained that no one wants to buy a business that can’t prove their profitability or at least the potential for profitability. And a bank won’t approve a loan on a business that can’t provide facts about the health of the business.
It’s all about minimizing risk. You have to look at the facts and be realistic in your expectations of what you will get out of the sale.
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- The Complete 35-Step Guide for Entrepreneurs Starting a Business
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- 17 Key Lessons for Entrepreneurs Starting A Business
Early planning pays off
Depending on your situation, you may want to start planning several years in advance, particularly if your financial statements are shaky. And don’t expect the offers to come pouring in once you list. While the median length of time a business is on the market is six months, be prepared to have your business listed for 12 months. And once an offer is accepted, plan on two to three months to close.
So if you’re thinking of selling, here are some tips to maximize your chances of a speedy sale:
1. Price it right. Use a professional business appraiser or broker if you’re having trouble pricing your business. Make sure your expectations are realistic and based on information you can prove.
2. Time it right. Sell your business when it looks the best. If you just snagged a big contract or received some great press coverage, that’s a good time to list.
3. Get your financials in order. You will need to provide three years of financial statements including tax returns. Also, make sure there is adequate cash flow that will continue after the business is sold. It’s also a good idea to ensure any current financing the business carries has reasonable terms.
4. Diversify. Make sure your customer base is diversified instead of just a few main clients. Likewise, make sure your revenue isn’t coming from just one or two salespeople. Both scenarios could signal additional risk to a buyer.
5. Plan for how the business will be managed after the sale. Are you a critical figure in managing your business? Unless you’re a one-person operation and the buyer has that same expertise, make sure there are key people in place who know how to carry on without you.
6. Keep your employees in mind. If you have employees, make sure all policies and procedures are in writing. You want to make sure that not only the business continues smoothly, but that the employee’s expectations are kept. If the new owner wants to change things, fine. But at least the new owner will know what the employee expectations are if everything is in writing.
7. Document. Make sure all customer and vendor agreements, partnerships, contracts, and any other important negotiations or arrangements are in writing.
8. Look good. Just like selling a home, make sure your business has good curb appeal. Declutter, repair, clean, repaint, freshen up, etc. First impressions are huge. If your normal work mode is a desk stacked high with piles of paper, or worse, you operate within a personal tornado of chaos—clean up your act. Otherwise, a buyer will think that other areas of your business are just as chaotic and they may run the other way.
So you’re probably wondering, whatever happened to Gerald? Well, there weren’t multiple buyers beating down his door. Actually, there was only one. It came from Gerald’s long-time employee, Steve, at the paint store.
Gerald was thrilled and even offered to finance the transaction. He and Evie could wait on purchasing their Florida vacation home, and besides, there were tax advantages with spreading the payment out over several years. Then Steve looked at the financials. Steve felt Gerald’s asking price was too steep, and things fell apart from there.
Gerald still owns the paint store and Steve still works there. Their relationship is strained, and now Gerald’s health is deteriorating. No one is sure what will happen to the store. It’s an unfortunate situation that could have been prevented with adequate foresight and planning.
If you’re looking to someday sell your business (every business owner should have a succession plan, but that’s an article for another day), start planning now. It’s not too early. With strategic preparation, when you’re ready to sell you just might get the price you’re asking for.
RELATED: Selling a Business? Consider These Valuable Lessons From Baseball Great Yogi Berra
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