Ready to sell your business? Whether you want to retire, start a different venture or just take a break for a while, this is a good time to sell, according to BizBuySell’sInsight Report. Median sales prices are at record-high levels.
There’s a lot of preparation that goes into the selling process, says Luba Kagan, Business Development and Strategic Partners Manager at BizBuySell. One of the first questions potential buyers ask is “Is the business worthy?” You need to show that it is.
You’ll need to get your documents in order. In some cases, business owners have prioritized minimizing taxes and not showing profits. While this may have helped you take home more money, it’s not beneficial when you’re trying to sell. Buyers, Kagan says, will likely use standard industry formulas to evaluate the value of your business (such as multiple of earnings or multiple of sales).
One way to avoid this problem is by planning early. If you know you’re going to sell in 3 to 5 years, Kagan advises “to start reporting your earnings with this in mind.” While you may have to pay more taxes, your business will likely sell for more.
Determining Your Sales Price
To determine a fair price, Kagan recommends starting by estimating the value of your tangible assets. Make a list of your physical assets (furnishings, fixtures, equipment and inventory) and consider their acquisition cost, age and condition when estimating their value. If these assets are close to the worth of your business, Kagan suggests it might be more cost-effective to liquidate those assets before you sell.
The specific financial statements you’ll need are:
- Income statement with gross revenue, expenses and bottom line profits or losses
- Cash flow statement
- Balance sheet
- Statement of seller’s discretionary earnings showing how much your business makes after backing out non-recurring and discretionary expenses
Your accountant can help you create a statement of owner’s cash flow or statement of seller’s discretionary earnings. This, says Kagan, is the basis for sale pricing and of primary interest to buyers.
Estimate Value Using Earnings Multiples
There are numerous factors that affect your multiples, including business type and location. Typically, business values range from 1- to 4-times your annual cash flow. Estimate your earnings multiplier by assessing your business in key areas, such as revenue and profit trends, products, customer base, or position in its industry. To determine an estimated sales price, multiply your seller’s discretionary earnings by your earnings multiplier.
Analyze the Comps
Compare your estimated sales price with the prices of other businesses for sale in your industry and area.
Closing the Sale
Kagan says you should create a pre-closing day checklist. Your attorney and accountant will know what specific papers you’ll need, such as the government and tax forms required by your Secretary of State, any transfer contracts and agreements, list of accounts receivables and accounts payable, loan documentation and more.
Kagan suggests scheduling your closing in the morning when it’s easier to reach banks and government offices. “Aim for the last day of the quarter, month or pay period to simplify proportion of monthly expenses that transfer with the sale,” she adds.
Remember you and the buyer have different goals. Price is important to you, while terms and conditions are important to them. Kagan says you may be able to get the price you want if you provide the terms and conditions the buyer finds valuable, such as a seller financing option, or transition timing, etc.
If this sounds arduous, you might opt to work with a business broker. Kagan suggests checking with the International Business Brokers Association, your local business brokers organization, or this list of brokers on the BizBuySell site.
About Rieva Lesonsky
Rieva Lesonsky is CEO and Co-founder of GrowBiz Media, a custom content and media company focusing on small business and entrepreneurship, and the blog SmallBizDaily.com. A nationally known speaker and authority on entrepreneurship, Rieva has been covering America’s entrepreneurs for more than 30 years. Before co-founding GrowBiz Media, Lesonsky was the long-time Editorial Director of Entrepreneur Magazine. Lesonsky has appeared on hundreds of radio shows and numerous local and national television programs, including the Today Show, Good Morning America, CNN, The Martha Stewart Show and Oprah.
Lesonsky regularly writes about small business for numerous websites and for corporations targeting entrepreneurs. Many organizations have recognized Lesonsky for her tireless devotion to helping entrepreneurs. She served on the Small Business Administration’s National Advisory Council for six years, was honored by the SBA as a Small Business Media Advocate and a Woman in Business Advocate, and received the prestigious Lou Campanelli award from SCORE. She is a long-time member of the Business Journalists Hall of Fame.
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