As a business owner, you've worked hard to achieve success. You've met and overcome many challenges, but despite these experiences, if you're like most owners, you are not prepared for what is usually a once-in-a-lifetime experience -- selling your business.
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The decision to sell is one of the most difficult decisions you will make. Whether you plan to sell now or later, the day will come when you will need to turn your investment into liquid wealth by selling your business. The desire to pursue personal goals and the ability to achieve financial independence from the sale of your business must be balanced against the challenges and stimulation of operating and owning a business.
Because of the complexities, most business owners realize they have to plan for the sale of their business a few years prior to the actual transition. Properly planning and positioning your business will increase its value and allow you to maximize its sale price. Here are just a few of the key factors to consider in the planning process.
A business valuation identifies the realistic market value of your business. This provides necessary information which enables you to determine if your personal and financial goals can be achieved through the sale of the business.
There are several ways to determine the value of your business.
A competent professional can accurately estimate the parameters of an equitable price. Historical operating performance and future projections will be factors in determining value as well as the timing of the sale, marketplace conditions, off balance sheet assets, synergy with the prospective buyer and the structure of the deal. Often the valuation process will identify specific areas of improvement which could add value to your business.
Many businesses are initially offered at a price above the market. Fairly priced businesses generate interest quickly and usually sell at the offering price. Properly pricing your business will enable you to achieve a relatively quick sale (6-8 months) at full price and terms.
In pricing a business, it helps to view the opportunity as a prospective purchaser. Viewing your business from a buyer's perspective will serve as a blueprint for building business value. Buyers require that at least three, and generally four criteria be met:
A more profitable business will almost always generate a higher selling price and sell more quickly. In setting value, buyers concentrate on cashflow, growth and stability. You need to ensure that your value-building program focuses continuously on these objectives.
Effective value-building strategies should also match your specific horizon goals.
Many businesses generate significant cash revenue. Report all revenue. While some owners freely admit that there is a lot of cash in the business, most astute buyers won't pay for unreported funds and banks won't finance a transaction which doesn't demonstrate a strong cashflow.
There are many personal benefits, often categorized as expenses to minimize taxable income, that are beneficial to the owner. Automobile, travel and entertainment, personal pension, insurance expenses and payments to children as salary are typical examples. When selling your business, identify these "owner perks" to show real profitability. Accurately documenting these "expense" items will enable you to realize a higher sales price. Banks will often accept these adjustments if they are well documented. Some owners actually reduce or eliminate benefits for the year immediately prior to a sale to achieve the best sales price.
Present your business as a clean opportunity with assets that are productive and provide the maximum investment return.
A few owners attempt to sell their business on their own, although, the required time and effort involved in selling, often detracts from the day-to-day operation of the business and ends up in frustration.
A professional intermediary broadens the base of qualified buyers and assists in every phase of the selling process. The role of the intermediary should include properly pricing the business, establishing terms, preparing an accurate offering prospectus, attracting and carefully screening qualified purchasers, assistance in obtaining financing and guiding the transaction through closing.
In addition to a "broker", a competent accountant and lawyer are important professionals to include on your team. An accountant will assist in the financial analysis and in properly structuring the transaction to minimize tax obligations. A lawyer will protect your legal interests and draft the appropriate documents.
Terms - The terms of the transaction are often as important as the price. The equity investment from a purchaser should be significant--25 to 30 percent of the sales price is a reasonable range. Banks usually look at market value of
the assets or other collateral, as well as the cashflow, when determining financing. In most transactions today, the seller is expected to finance a portion of the sales price. Seller terms may take the form of a fixed note, a consulting or non-competition agreement or some type of pay-out based on performance. Equity, safety and tax considerations are all important factors.
The process of obtaining personal and financial independence through the sale of your business is complex and demanding. Your business may be your largest single asset. Proper planning may result in the realization of additional income at the time of sale. This may be a once in a lifetime opportunity - Shouldn't you cash out on your own terms?
Portions of this article appeared in the December 1993 issue of Profile Magazine.
M&A Canada provides a variety of financial services to owners of closely-held businesses including acquisition services, business brokerage, valuations and financing proposals. M&A Canada has affiliate relationships across Canada and throughout New England.