Top Strategies for Successfully Selling Your Business
Selling a business can be a complex and emotionally charged process. Whether you’re an entrepreneur looking to move on to new ventures or a seasoned business owner ready to retire, maximizing the value of your business and finding the right buyer are crucial elements for a successful sale. In this article, we’ll explore some of the best ways to sell a business, encompassing both practical and strategic approaches to ensure a smooth and rewarding transaction.
Prepare Your Business for Sale
Before listing your business on the market, it’s essential to prepare it thoroughly. Potential buyers will scrutinize every aspect of your company, so take the time to tidy up financial records, audit inventory, and resolve any legal or compliance issues. Presenting a clean and organized business will instill confidence in potential buyers and set the stage for a smoother due diligence process.
Determine the Business’s Worth
Accurately valuing your business is critical to attracting serious buyers and receiving fair offers. Several methods can be used to determine the value of a business, including the income-based approach, market-based approach, and asset-based approach. Consult with a professional business appraiser or a business broker to help you arrive at a realistic and competitive asking price.
Hire an Experienced Business Broker
Engaging the services of a reputable and experienced business broker can significantly enhance your chances of selling your business successfully. A business broker possesses the expertise to navigate the intricacies of the selling process, identify qualified buyers, and negotiate on your behalf. They also maintain confidentiality throughout the transaction, safeguarding sensitive information about your company.
Create an Attractive Sales Memorandum
Craft a comprehensive sales memorandum that highlights the strengths, achievements, and growth potential of your business. This document serves as a marketing tool to attract potential buyers and provide them with valuable insights into your business’s operations, financial performance, and competitive advantages.
Identify the Right Buyer
Selling to the right buyer is not just about getting the best price but ensuring a smooth transition for the business and its employees. Look for potential buyers who possess industry experience, shared values, and a vision that aligns with your business’s future. Cultivate relationships with potential buyers discreetly to gauge their interest and commitment.
Negotiate Fairly and Transparently
Negotiations play a pivotal role in the selling process. Be prepared to discuss terms and conditions openly with potential buyers. Establish a realistic starting point for negotiations and be flexible when finding common ground. Transparency and honesty are crucial during this phase to build trust and credibility with potential buyers.
Prepare for Due Diligence
After finding a serious buyer, they will conduct due diligence to assess the validity of the information you provided and to uncover any potential risks. Be prepared to cooperate fully and provide all requested documentation promptly. A well-prepared due diligence process can inspire confidence and expedite the sale.
Seek Professional Legal and Financial Advice
Enlist the services of experienced attorneys and accountants who specialize in business sales. They will help draft legally sound agreements, ensure compliance with regulations, and provide tax advice to minimize liabilities and optimize the financial outcome of the sale.
Conclusion
Selling a business requires meticulous planning, preparation, and execution. By following these best practices, you can increase your chances of selling your business at the best possible price, to the right buyer, and in a manner that safeguards your legacy and hard work. Remember that patience, flexibility, and the support of seasoned professionals will be invaluable assets throughout the entire selling process.
Video Transcript
What Are the Best Ways to Sell a Business?
A lot of times, business owners have spent their whole lives building a business, but they haven’t thought a lot about selling it and what their options are for doing so. So their first response is usually to look at, “Could I sell it to one of my employees, or could I pass it down to a family member like a daughter or son?” If that is not an option, for example, maybe the employee doesn’t have the money to buy out the business owner, it is usually a problem. Perhaps the son or daughter doesn’t have the skill set to run the business, and that is often a problem.
Engaging with Business Brokers
The business owner then looks to find outside sellers, and usually, what they do is look for a business broker. A business broker, for example, might be Sunbelt or Calhoun companies, or one of these other business brokers. There are nationwide companies that sell businesses, and there are local companies that sell businesses. Sometimes, companies or brokers will focus on a particular niche, like dental practices. They will work with dentists who own practices to find another dentist to buy that practice, and the nature of the dental practice is unique enough that there is value in having a broker who understands that sort of business. Of course, the buyer has to be a dentist so that brokers can help find buyers. So that is one option.
Maximizing Value with Strategic Buyers
But often, business owners don’t know what the other options are. One of the best options is to find a strategic buyer. A strategic buyer is somebody who will benefit not just from the profits of the business if it continues to be run as it is, but also from some sort of synergy with that buyer’s existing business model. For example, let’s say you have a technology company that creates a really nice feature that it has patented as part of an e-commerce store. If Amazon were to buy that company, they wouldn’t necessarily just be concerned about how much money can that company keep making using its existing business model. Amazon might want to use that technology for its entire e-commerce platform. There is an example of where the synergy because of Amazon’s business model produces far more value to Amazon than just the profits of the company they acquired. So often when you are selling your business to a third party, you are going to be paid on a multiple of EBITDA. In other words, you are going to be paid a number of years, so say three years times (that is multiple), three times EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA is essentially a way of formulating the profits of the company.
The ESOP Option: Selling to Employees
And so sometimes when selling a company, you will look at three years of profits as the sale price. But if it is a riskier company that may not last a long time, maybe you would do one year of profits as the purchase price for the company. Or if it is a company that is going to be around for many, many years, like a utility company, you might say fifteen years of profits is what a buyer would pay for that company. What I usually see is somewhere between two and seven years of profits for most companies. For example, a manufacturing company might be five years or seven years, especially if they have some intellectual property like patents. So if you sell to a strategic buyer, you are going to get much more than the usual calculation of profits times a certain number of years because the strategic buyer can benefit much more from that acquisition. So a strategic buyer is one of the best options.
Seller Financing: Employee Buy-In and Control
Another creative option that isn’t considered much is setting up an ESOP. An ESOP is an employee stock option plan. It allows you to sell some or all of your company to your employees. Most people don’t understand how this works, so I will summarize it really quickly. The company, which we assume has some financial stability and some forecasts that are profitable, can take those financial reports to a bank and say, “Hey, bank, we would like to borrow against this so that the employees can buy some of the stock of the company.” Let’s say the employees buy 49% of the company so that you, as an owner, might remain a 51% owner. That is one way to do it. Another way is you give the employees majority ownership, but perhaps you reserve a seat on the board or a controlling role on the board so that you are still able to control the company, even though you give up most of the profits. So hypothetically, let’s say you give up 60% of the shares of the company to the employees. This would go into typically a trust, and you would have a committee or trustees who manage that, and in exchange for the employees buying these shares from you, let’s say you get a million dollars, but the employees don’t have that million. So where does that million come from? It comes from the bank. So the bank loans the money to the trust and the company, which guarantees repayment, and the shares are often collateral for that debt. And that allows the owner to take some money off the table if you will. So that is one way owners can get money out of their business by selling a portion of it.
Venture Capital Firms: An Alternative Approach
Now, there are a lot of pitfalls with an ESOP. Also, it requires significant professional expenses. In my experience, you will pay between $50,000 and $150,000 to set up an ESOP. And then you will often pay close to $50,000 a year to maintain it. So it is not for every company, but for larger companies where the idea is to pass along ownership to the employees, that can be valuable.
Finding the Right Fit: Hybrid Scenarios
Another option is to sell the business to an employee in the company who might acquire the shares over time. And it might be seller-financed, meaning, you as an owner, are helping loan the money to the employee to buy it back from you. The interesting aspect of this is that by seller-financing, you can get stronger employee buy-in, at least as how the theory goes, by having the employees be the owners. But there are some common problems with seller financing. First, who has ultimate control over the company? If the seller, the long-time owner maintains control, the buyer, the employee may feel like, “You know what, it doesn’t feel like I really own this business if I can’t control it and I am committing years of my life to this, and it is frustrating that I don’t control it. I don’t have any say.” So usually, the buyers want to control the business, but then what happens if the buyers make changes that the long-time owner is not comfortable with? Normally, that owner feels like you are destroying my company, and I am not going to get paid if you destroy my company by making these dumb decisions. Typical decisions that are controversial from my experience are the employee wanting to implement new software that the employee feels will make the whole system better, more efficient, produce better results and better information. The seller usually is not as tech-savvy because they are older, and they say, “It is working well as it is. Why create all the complexity and distraction of new software when we can just keep running it as it is?” Also, the seller, the owner might say, “This software will cause me to lose touch with what is actually happening in the company. And I like running things the way they are. I don’t want to learn a bunch of new software to figure out how things go.” So that is just a glimpse of some of the problems with seller-financing from an owner, either to an employee in the company or to an outside buyer.
Summary
So when looking at selling your company, there are a couple of other options. You could look at selling to a venture capital firm that will buy the company from you. And then there are some hybrids of the scenarios we have talked about today.
What is the takeaway here? The takeaway is to figure out what is the best option for you when selling your company, and how can you get the most money from the company while also keeping in mind you want some assurances of actually getting paid because a promise of a lot of money that you never actually get paid is worse than a more reliable payment that you can bank on or that you can put in your pocket.
Conclusion
If you have any questions that didn’t get answered, or if you are watching a recording of this, feel free to put your questions in the comments section below. I would be happy to answer them. If you like videos like this where you can learn about business law and avoid some of the common problems that business owners face as they are growing a company, feel free to subscribe on YouTube or any of the other social media platforms that you use. And if you would like exclusive online educational content for founders and business owners, you can get that at aaronhall.com/free. It includes a checklist of common problems faced by new businesses. It includes videos going in-depth into some of those problems so that you are empowered to set up your company for success. Thanks for joining us today. I look forward to seeing you at the next live session.