How to sell a business?

Top tips to sell a business

1. Determine the value of your company.

A third-party valuation can provide a realistic estimate of what your business is worth, says Timothy Lee, managing director of corporation valuation services for Mercer Capital, a business valuation and financial advisory firm in Memphis, Tenn. For a set fee, often ranging from $3,000 to $7,500, a qualified valuation professional can review a business and its competitive environment. The review typically considers everything from sales to receivables, inventories and other assets, as well as outstanding debt or liens, all with the goal of identifying business threats and opportunities that define value.

2. Clean up your small business financials.

In today’s relatively soft market, prospective buyers want as much transparency as possible, says Steve Rosen, a Philadelphia-area business broker with Sunbelt Business Brokers. They are performing more careful due diligence, kicking the tires on everything from a business’ financials to its real estate and equipment. “They’re contemplating longer,” Rosen says.

3. Prepare your exit strategy in advance

All too often, an unexpected factor—an aging or ill owner, lack of interest in succession from adult children, a competitive threat such as the arrival of a big-box store—forces small business owners to sell. So if you plan to outlast your competitors, prepare your exit strategy now, before such a situation forces a sale, says Ed Knox, founder of White Plains, N.Y.-based Yarmouth Venture Group, an advisory to investors looking to invest in small businesses. Among Knox’s favorite selling strategies is one that is often overlooked: having a trusted employee take over the business. “He’s on the inside, knows all the customers, knows all the skeletons in the closet,” says Knox. If you do sell to an industry outsider, “there needs to be sufficient transition time so the new owner will feel comfortable with the industry,” he says.

4.Boost your sales.

Buyers want to see businesses with some upside, says Todd Cushing, principal at EBIT Associates, an intermediary in Barrington, Ill., that works on retainer to help small to mid-size companies prepare for sales and identify buyers. “When sales are declining, that’s not when to sell,” he cautions. Cushing adds that buyers might also get skittish if a single customer represents more than 20 percent of revenue, putting sales at risk if that business is lost. If necessary, he says, diversify the customer base or jumpstart sales with increased marketing and promotions. While you’re at it, push out bloated inventories and get operating systems up to date. Retail establishments might warrant a fresh coat of paint and some new fixtures, while restaurants might update their menus and say goodbye to disagreeable staff. Overall, Cushing says to ask yourself: “What do you have to do to get your sales to increase?”

You might be a terrific widget maker but a lousy salesman. That’s one of many reasons to consider outside help with a sale. For companies with less than $5 million in annual revenue, “help” usually means enlisting a business broker who will charge a commission of 5 to 10 percent of the sale price. In this case, the broker often performs the business valuation. He or she then prepares a prospectus and taps into a large network to locate buyers, including listing the business with suitable marketplaces, and applies a background in deal-making to get the best price. Brokers can also steer buyers to financing resources.

6. Pre-qualify your buyers

The vast majority of small business transactions are paid for in part by third-party loans, with many backed by the U.S. Small Business Administration, says Rohit Arora, founder of Biz2Credit, a small business online-lending platform that matches borrowers to lenders for business transactions, including acquisitions. A major reason many deals fall through, he says, is because sellers enter transactions with buyers who are unable to secure financing. “Always pre-qualify your buyers,” Arora says, and “don’t get overexcited” by an offer. In most deals, Arora says, banks will also want the sellers to provide a portion of financing for the transaction; this ensures the seller has a vested interest in the venture’s ongoing success under new ownership.