Considerations When Selling a Business
According to the U.S. Small Business Administration and Project Equality, 60 percent of business owners plan to cash out of the business in the next 10 years. For the baby boomer generation, it’s especially important as they contemplate retirement, with this generation reportedly owning 2.3 million businesses. When it comes to getting a business ready for sale, there are many components to review and get organized before looking for prospective buyers.
The first thing owners looking to sell their business are being asked is why they’re selling. This may occur for many reasons – voluntary or not. Some people are looking to retire, while others might be looking to exit their business because things soured with partners. These are just some of the reasons why business owners or partners want to sell their business or stake in a company. Entrepreneur magazine says there are “three ways to leave a business – sell it, merge it or close it.”
According to Entrepreneur magazine, there are many considerations for business owners when they are contemplating selling. For profitable companies, it’s more often due to choosing to sell, but not always. When there’s the desire to sell a business, if the owners can show potential purchasers some or all of the following, chances are it will sell sooner than later and for a fair price: growing income, profitability and a customer base, along with a business plan and product/services with long-term potential.
Another consideration is timing of the sale. Ideally, getting the business’ house in order will benefit both the seller and the buyer. With this in mind, it’s important to have a few backup buyers in case the first deal falls through. One reason a deal may fall through is because the buyer didn’t qualify for financing before the sales process got serious. This planning can give the business owner and potential buyers time to review, audit and organize financial records; review and determine the business structure; and determine and analyze the business’ customer base. This review and organization will be able to help the new buyer maintain business continuity, if they decide to purchase the business.
The next step is to get documents in order. Organize the cash flow statement, balance sheet and income statements, along with tax returns from the past few years. It’s important to inventory all equipment, intellectual property, trade secrets, etc. to see what can be sold and transferred and verify the current market value of each. Taking stock of both sales records and suppliers, and getting contact information for both will help make a sale more likely. Depending on if the information is proprietary or not, it’s important to have this ready to share, under confidentiality, with potential buyers. An operating manual and a general overview of the business are also necessary in order to show the company’s presence clean and repaired.
Another consideration is how business assets that aren’t so easy to touch will be valued. According to the American Bar Association, goodwill is an intangible asset, such as reputation, along with intellectual property like trademark. The New York State Society of CPAs’ (NYSSCPA) publication, The CPA Journal, reports that goodwill has an indefinite life, and one way to see if it meets the test of being goodwill is if it “is inseparable from the business.”
Another consideration when selling a business is to see its recent cash flow and to calculate it properly for potential buyers. According to the NYSSCPA and the Statement of Financial Accounting Standards (SAFS) 95, cash flow from operating activities (CFO), per the SFAS 95’s statement of cash flow (SCF), is calculated by starting with the net loss or income and then factoring in differences in working capital and non-cash sales.
Once the CFO is calculated, this figure shows how much the business earns from its operating activities, as the name implies. It’s important to see how this figure differs from investing or financing operations that may be ancillary to the company’s irregular financials. Once this information is known, it gives potential buyers an accurate assessment of the company they are buying to see if they’re comfortable with the existing business. Showing a business that’s doing well can help attract buyers at a fair price.
While each business is different and the reasons for exiting it vary, understanding what potential buyers are looking for can increase the chances of a fast sale at a fair price for both seller and buyer.