Only about 30% of all small businesses listed actually sell.
1
Although there are any number of reasons for this low percentage, the
three most common are: (1) failure of the seller to accurately document
the financial history of the business; (2) limited marketing and (3)
over-pricing the “product.”
Here are some tips to help maximize the sale of your small business:
Document the “Product”
Yes, when you are selling your business all that
blood, sweat, tears and life you have invested in your business is
suddenly reduced to a cold-blooded commodity (from the buyer’s
perspective): the “on-going concern"
product. This
product you now wish to sell may include real property, receivables,
payables, an income stream, employees, a portfolio of clients,
copyrights, trademarks, vehicles, machinery, debts, executory contracts
and other personal business property assets.
The valuation, listing, marketing and sale of your
business may require you to employ an appraiser, commercial broker,
accountant and an attorney. Gather your financial statements and
tax returns dating back three to four years and review them with your
accountant. Develop a list of the assets to be sold with the
business. You will need to create multiple packages of this
documentation for sharing with potential buyers together with a summary
description of your business and its operating/to-do manuals.
Market the “Product”
The first question almost any potential buyer
asks: “Why are you selling?” It is a question the answer to which
you should have determined long before you have to respond to a buyer’s
query. Once you make the decision to sell your business, you need
to prepare for the sale as early as possible. According to SCORE,
2
the sale of an on-going business concern usually takes between six
months and two years. Thus, at a minimum you should start the process
one to two years ahead of your target exit date. This preparation
necessarily includes updating and codifying your financial records;
filing and paying all outstanding taxes (federal, state and local
business property taxes); taking steps to strengthen your business
structure; and organize your customer and vendor bases.
The next question then becomes whether to try to sell
the business yourself or through a business broker. You may be
the best salesperson for the job, particularly if you are selling to a
known buyer or existing employee. However, if you are looking for a
greater market or pool of potential buyers, retaining a business broker
will significantly assist the sale process. An added benefit is
that employing a broker to concentrate on marketing and field
prospective buyers enables you to keep your business running – which, in
turn, tends to maximize the price. If you do employ a business
broker, discuss your expectations and marketing concerns with the broker
and remain in constant communications throughout the listing
period. Whether you work alone or with a broker, however, try to
maximize your advertising to attract more potential buyers.
Price the “Product” to Sell
Not surprisingly, owners of small businesses are
frequently invested emotionally in their enterprise which makes
objectively valuing the business a tricky, if not altogether impossible,
proposition. For that reason, engage a business appraiser to obtain an
independent valuation. Much like a savvy buyer, the appraiser will
review your financials and assets and provide a detailed explanation of
the business's worth. Not only will an independent appraisal
enhance the credibility of your asking price, but the appraisal process
itself will assist you in understanding what a prospective buyer will
review during the due diligence period of any prospective sale.
Make Sure the “Done Deal” is Done Right!
In all probability, the sale of your business will be
the largest financial transaction of your life – and maybe the buyer’s
life as well. Having litigated many commercial disputes, I cannot
emphasize too strongly that it literally pays to make sure the sale is
done right: in other words, Ben Franklin’s adage “an ounce of prevention
is worth a pound of cure” has never been more applicable than in the
sale of a business.
The documents of any business sale are complex and
varied. They may include a pre-buyer review Confidentiality and
Non-Disclosure Agreement; the Buy/Sell Agreement; Bills of Sale;
Assignments; Seller financing documents (Promissory Note, Security
Agreements, Deeds of Trusts or Mortgages); and other Post-Sale
Employment and Non-competition Agreements. And if you have
minority shareholders or members, you will need an attorney to ensure
that a sale of all ownership interests occurs and that the proper
internal corporate agreements, resolutions and disclosures occur.
Many times sellers unwisely rely on the buyer’s
attorneys to prepare the final documents. Both sellers and buyers need
the assistance of independent counsel to review terms of sale, financing
and other potential legal issues, as well as to negotiate the finer –
but important – points of the deal. Attorney’s fees and costs will
vary, but you can expect to pay approximately 1½% to 5% of the gross
proceeds of sale in legal fees and costs. In sharp contrast,
litigating a poorly documented transaction can easily consume the
presumed value of the transaction for either party.
Selling your business is a time-consuming, emotional
venture. You may be able to obtain free counseling from
organizations like SCORE or your local chamber of commerce. Employ a
team to assist you: accountant, broker, appraiser, legal
counsel. We at Marshall, Roth & Gregory, PC wish you the best
in your business transactions, and stand ready to assist you in all
aspects of your business’ legal needs.
Note:
In the coming months, A Legal Moment will provide tips for buyers of
small businesses and web links to seller’s and buyer’s checklists.
If you have further questions on how to sell your small business, do
not hesitate to contact the attorneys at Marshall, Roth and Gregory, PC.
1 Siegel,
Peter M., “Selling a Small Business – 12 Crucial Steps,”
http://www.nfib.com/article/selling-a-small-business-12-crucial-steps-35825/
2 SCORE
is a non-profit confidential small business mentoring and advice
service association which partners with the U.S. Small Business
Administration (www.score.org)
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