On the Market: Selling the Business

On the Market: Selling the Business

Even successful, small business owners decide they’re ready to move on to other projects, to slow down, or even to retire altogether. For companies facing fiscal challenges, selling the business may be the only option available.

Understanding the basics of commercial sales minimizes legal and financial problems during the sales process. Owners who wisely seek outside consultation should still understand the big picture in order to: (1) oversee the sale, (2) ask the right questions, and (3) properly weigh the options provided by professional consultants, e.g. lawyers and accountants.

As the facilitator of a business sale – especially if you own the business – it’s critical to understand widely-accepted, best practices of selling a business.

  • Consider timing. Research shows that, under normal market conditions, only one-quarter to one-third of all small companies on the market actually sell.

    Selling when a firm’s profits are hefty and the bottom line sound is certainly easier than trying to unload a foundering enterprise. Lower interest rates, a healthy economy and financing options clearly increase the likelihood of a profitable sale. Given today’s economic uncertainties, staying open for business is prudent. Unless the owner lacks other options, selling in an unfavorable market greatly lowers chances for a successful sale.

  • Tighten up company finances before posting a "For Sale" sign. A year prior to selling, make sure taxes are current and all payables are up to date. Make every effort to collect accounts receivable, as well. At least 12 months prior to announcing the sale, hire an accountant who specializes in commercial sales.
  • Upgrade outdated or inadequate business software. The goal is to generate accurate documentation for prospective buyers’ review. New software should accurately record inventory records, invoices, cash-flow statements, audit reports and other fiscal data.

    Client relations management (CRM) software shows day-to-day operations at a glance, providing complete understanding of order flow, projects in progress and a history of successful engagements with repeat buyers or regular clients. Update your business with CRM. It adds authority to business operations and simplifies the transition of ownership.

  • Use a business broker. These professionals assist in the purchase and sale of companies, usually at a fee of up to 10% of the selling price. One of the chief advantages to using a broker is that the company owner(s) continues to run the firm during the sale process, which can be lengthy.

    A business broker: provides assistance with sale pricing; offers practical, unemotional advice; interprets market conditions; identifies serious buyers; files sale-related paperwork; acts as a liaison between seller and attorneys, accountants, bankers, insurance agents and other parties involved in the sale; and communicates with appropriate parties including vendors, clients, employees and the community.

    When choosing a broker, research credentials. Determine that the broker has a current real estate license issued by your state. In addition, the International Business Brokers Association (www.ibba.org) issues the title of certified business intermediary (CBI), a recognized designation in the field.

    Ask about years of experience, tools used to research buyers, and previously proven marketing strategies, including PR materials like brochures, press releases, email auto-responders (ARs) and other written communications. Get everything in writing – a contract drawn up by your attorney to ensure your interests are protected.

  • Conduct a business valuation. Doing this compels a business owner to get company affairs in order prior to a sale. It also sets a realistic valuation on the company. A valuation weighs tangible assets like real estate and equipment. Intangible assets, like intellectual properties and business reputation also factor in to an accurate valuation of a business.
    • Income valuation assesses a firm’s potential earning power based on past revenues, projected growth, management strength and other risk variables.
    • Market valuation estimates a firm’s worth in the current market by comparing sales figures of similar businesses.
    • Asset valuation determines fair market value for physical assets, like buildings and equipment, as well as intangible assets, such as clientele and employee loyalty, brands, trademarks and patents. Liabilities, debt, for instance, are deducted from the total assets.
    • Factors determining a business’ worth run the gamut, so hire a professional appraiser to do the legwork. A pro can find assets an owner overlooks. When searching for a valuation specialist, seek one who’s earned formal credentials. A number of organizations offer professional certifications, including:

    • Institute of Business Appraisers (www.go-iba.org). The IBA offers a Certified Business Appraiser (CBA) designation. To attain this credential, applicants must meet education requirements, pass an exam and have 10,000 hours of business valuation experience or 90 hours of advanced course work.
    • American Society of Appraisers (www.appraisers.org). The ASA’s premier business valuation designation is Accredited Senior Appraiser (ASA), which mandates education requirements, passing an exam and five years of full-time business valuation experience.
    • American Institute of Certified Public Accountants (www.aicpa.org). The AICPA grants the Accredited in Business Valuation (ABV) designation to CPAs who pass an exam and demonstrate a designated degree of field experience.
    • National Association of Certified Valuation Analysts (www.apexvaluation.net). NACVA offers the Certified Valuation Analyst (CVA) credential, mandating a CPA license, attendance at a five-day training course (optional in some cases), passing an exam and completion of a case study.
  • Communicate with potential buyers in clear terms. Once a sale opportunity presents itself, some proprietors find final negotiations unexpectedly complex. To avoid sabotaging the deal, discuss major provisions before talking price. Honest conversation eliminates unqualified buyers immediately - a task a business broker can take on. Topics to address are:
    • Assets that are part of the sale, such as key contracts
    • Purchase price due at closing, as well as payment plans
    • Seller’s role in the company after the sale
    • Final selling price

    During negotiations, the owner should notify the buyer that everything discussed will be subject to the company attorney’s review.

  • Develop a detailed sales agreement. The Small Business Administration (www.sba.gov) provides a list of elements that must appear on the sales agreement at closing. Of course, an attorney reviews the terms prior to signing.
    • Seller, buyer, business names
    • Background information
    • Assets being sold
    • Purchase price, allocation of assets
    • Covenant Not to Compete
    • Pending adjustments
    • The Terms of the Agreement, payment terms
    • Inventory included in the sale
    • Compliance with the state’s Bulk Sales laws
    • Any representation and warranties of the seller and the buyer
    • Determination of access to business information
    • Determination of business management prior to closing
    • Contingencies
    • Possibilities of having the seller continue as a consultant
    • Fees, including broker fees
    • Closing date

You get the picture. There are numerous factors to consider when selling a business. Talk to a professional. Ask for referrals from business associates, or from your commercial bank officer.

Start early, seek professional advice and keep expectations realistic to enjoy the positive outcome all parties desire during the sale of a business.

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