Selling A Business 101: Q&A
Why are you considering selling?
Do you need the money? Tired or bored of the work or the industry? Retirement age? Each scenario creates a different type of sale. Urgency for it to sell changes the amount of leverage you have during the sale, and ultimately impacts how much you can end up getting out of the deal.
If you are on the fence about selling, ask yourself if you are actually ready to let it go and go through the process, or if you are just frustrated at the moment. The process is no small event.
What is a fair valuation?
There are several different ways to calculate the value of the business. From a multiple of profit or even revenue, to asset values, or even multiple on expected income based expected revenue (in rare cases).
The two most common methods are asset based (asset values plus goodwill) and multiple of earnings. Below are some sample valuation multiples of pretax profit.
Intensive Businesses (restaurants, auto shop, etc.): 1.7x - 2.5x
Profitable Retailers: 2x - 3x
Service Businesses (repeat customers): 3x
Businesses w/Long Term Contracts: 4x+
Software (w/MRR): 4x - 10x+
These are basic examples. The multiple varies by the degree of automation, stability, and the size. For businesses in the $5m+ profit range, the formula is typically 5x - 7x EBITDA (earnings before interest, taxes, depreciation, and amortization).
How can I maximize the valuation?
Make it more attractive to a potential buyer. Systemize the business so it’s not reliant on you. Investors that buy businesses want to just be able to buy it and put in a CEO or similar that runs it for them. When it’s systemized, the business is more likely to continue in its current trajectory. A safer bet for an investor, equating to a higher price they are willing to pay.
Another possibility is to have recurring income. The larger percentage of business that is on a recurring program, the higher multiple you can ask. There is a greater sense of security. When there are one time sales, there’s no guarantee of future income for the buyer. It could just fall off when the owner leaves - leaving them in a bad situation. With recurring revenue, there is a higher level of security in their investment because the revenue will most likely continue at the same level (excluding churn).
What do I need to do to prepare for the sale?
Similar to above, you need to straighten out the business. Make it attractive to potential buyers, have all of your ducks in a row. Make sure that the business can continue without you there. Consider letting your employees know that you are considering selling the business. It is a personal choice, but if you have a team that has been with you for a long time letting them know is a good practice. It will also help during the transition as it’s not a huge surprise for them. Some may not be happy, and that’s just how it’s going to be. But it allows them to prepare.
A big thing to focus on is making sure your books are pristine. Potential buyers are going to want to go through those with a fine toothed comb. Plus talking to you accountant for tax planning will help you immensely in the end.
How do I go about listing it?
Depending on the size of the company, you have several options. Above $250k profit, you may want to consider a brokerage firm. They will help you through the process and maximize the amount you can get. And of course they will take their cut. If you decide to go it on your own, there are several business listing sites, like BizBuySell or DealStream.
Rule of thumb for where to sell your business (figures in annual profit):
Private Listing: up to $250k
Broker: $250k - $5m
Investment Bank: $5m+
Where should I look for buyers?
For those of you who choose to sell on your own, buyers may be closer than you think. Maybe you know someone personally that would be interested. Let your contacts know that you’re selling (they may even known someone).
Competition that is bigger than you could be a potential buyer. They may be looking to expand, and buying up your business may be the best option for them.
Another option is talking to companies who do related work. If they are considering adding on to their offering, buying you would be a great deal for them. Not only do they get your customers, but there is massive cross-selling opportunities for them. They can offer a one stop shop for the products or services. Selling your customers their services, and visa versa.
Someone is interested, but they want to see everything.
That’s just how it works. They need to do their due diligence on the business to make sure the business is operating well. It is a good idea to have the sign an NDA, but be open with them. Don’t try to blindside them if there is an issue, talk through it with them.
Talking Terms - One time payment or money down with a payment plan?
Most sales are not full payments. The more capital required, the higher likelihood of a payment offer. Try to get as much down as possible, and have your lawyer draft up an agreement if you choose to go this route. Only do what you feel comfortable with.
If there is enough assets included in the sale, the buyer may be able to finance through a bank instead of you. You don’t need to be a bank for them, just be prepared for these types of offers.
I have multiple offers, what do I do?
This is great leverage, but don’t over play it because it can drive both buyers away. Remember you can counter and negotiate on terms to get a more favorable deal for yourself.
Personal connections can cloud judgements sometimes. This is the sale of your business, do what is the best move for you.
How does this work with taxes?
My best advice is to talk to your accountant. There are ways that the deal can be structured, so taxes are in your favor, and a way that is more beneficial for the buyer. If it is a complete buyout; the split between tangible and intangible assets makes a big difference. Or if it is just a tangible asset sale, it works differently.
Talk to your accountant before you even start negotiations, that way you know what would be the most favorable outcome for you.
The buyer is talking about a transition period, but I just want to get out.
Most times the buyer wants the owner to stay on for a period of time for transition. If this is the case, be sure to ask for good compensation for your time. It just depends on what you can negotiate.
For smaller businesses, this is the time where the old owner shows the buyer the ropes, how everything works, introduces them to key vendors or clients, and helps to create a smooth transition for the new owners. In larger business sales, this period can be several years; where the old owner stays on to keep things moving. Some people like this and others don’t - just be aware that a potential buyer wants the transition to be as smooth as possible.
Post-Sale - What do I do?
Something that’s not talked about very often is how most entrepreneurs who sell their business suffer some form of an identity crisis. Their label of owner or leader is no longer applicable to their situation. They had so much on their plate beforehand; goals, direction, something to work towards - now there’s nothing.
Taking time to relax and enjoy life is good, just know it will get boring. Have an idea of what you want to do after the sale.
Did we miss something?
Is there anything you want to know that wasn’t covered? Let us know, and we’ll add it to the article.