I'm happy to share this post from Dan Smith, a business broker in Southwest Florida. He tackles the big topic of how to prepare your business for sale. Dan helps you answer questions like, Could I sell my business now? What's my business worth? And he explains how you can prepare your business for a successful sale, by taking steps now, long before you are thinking of selling.
Preparing Your Southwest Florida Business for Sale
Getting your business ready for sale can improve pricing and reduce the time to complete a transaction, but there are two other compelling reasons to begin grooming your business:
- Most of the steps you will take are, in fact, good business practice.
- You never know when the opportunity for a sale might arise, either because of ill health or injury, or because an offer comes along that is too good to pass up.
Preparing your business for sale can take time, which means that you need to get started well in advance. Your reward is a feeling of confidence that you can seize the interest of more qualified buyers quickly, and possibly get a better price. You will also know that you are passing on the business in the best possible condition.
Could Your Business Be Sold Today?
To best determine whether this question can be answered right off the bat, the following steps and questions may help you assess certain factors buyers may consider when evaluating the worth of your business.
Assess the condition of your business as a sale prospect:
- Do you have the past 3 years of sales and profit history organized and properly documented?
- Over the past 3 years, have sales and profits consistently increased?
- Have costs and operating expenses increased only at a rate consistent with revenue increases?
- Do the assets of your business exceed the liabilities of your business?
- Is your business able to consistently cover its costs and expenses from the sales revenue?
- If your business success is reliant on its location, is it covered by a long-term and transferable lease?
- Does your business have modern facilities and equipment?
- Other than yourself, does your business have a staff that customers or clients know and trust, which can provide continuity after your departure?
- Do you have key staff members in place and secured to ensure a smooth transition?
What is Your Business Worth?
Whether you have determined that your business can be sold today or are in the exit planning stage, it may prove beneficial to discover what your business could potentially be worth by starting with a business valuation and analysis.
A business valuation involves many variables (and many of them are subjective) that often means various “experts” looking at the same company can formulate different recommendations. However, many small to medium- sized companies are sold for prices expressed as a multiple of cash flow or earnings. Each industry has a “rule of thumb” and an expected multiple that buyers expect to pay. If the business’s current financial picture doesn’t match a buyer’s expectations, one or the other has to be adjusted.
Today’s combination of low interest rates, capital market liquidity and significant pools of private equity and debt are driving a high level of business sales and B2B acquisition activity. This can be a great opportunity for business owners. The competition for quality deals is intense, putting upward pressure on business valuations.
Define Your Motivation and Objective
One of the first questions a buyer will ask is about motivation to sell. You need to be able to articulate your motivation; red flags are raised if the answer seems ambiguous and unsure. This is why it’s better to sell when times are good rather than the alternative.
- You’re bored
- You feel burned out
- You want or need to move to a different geographic area
- Personal changes in your life
- Your business would benefit from increased investment and energy
- Partner disputes
- Other interests
Your values can help guide you in setting your objectives. Take some time to think these through, perhaps discuss with your professional advisors, and come up with reasonable expectations.
- Maximizing the total value received for your business
- Maximizing the cash received on closing of the transaction
- Immediately transfer ownership and walk away from the business
- Transition ownership over a specified period of time (usually 3 to 12 months)
- Define your after-sale interests to help design a sale approach
- Preserving the well-being of existing employees, customers and supplier
- Remain with the company at the managerial helm post-closing
Get Your Books in Order
Prospective buyers will want to see at least three years of financial statements, including balance sheets and income statements. You will need to be able to document your business’s true profitability by identifying nonoperational expenses. Sellers need to quantify and substantiate these items because buyers purchasing a business are really buying its profitability. Ideally, business records should be separate from personal records. If your expenses are a bit tangled, it will be greatly beneficial to separate and create a financial profile history for just the business.
Be Sure All Legal Commitments are in Order
Understanding permits, leases, licenses, client and vendor contracts and how each impacts your business is essential in the selling process. For example, if the business location is key to its performance, a long-term lease with options at or below fair market value would be appealing to a buyer.
Understand Tax Implications
You will be taxed on the profit you make from selling the business. You may be able to control the timing through the terms of the deal, but the IRS will take its share at some point. The amount of tax you will ultimately have to pay depends upon whether the money you make from the sale is taxed as ordinary income or capital gains. Allocation of Sales Price Governs Tax Consequences. There are a number of qualifications to the rules, and issues that present planning opportunities for sellers of businesses.
Here are some that frequently come up:
- Ordinary income vs. capital gains
- Installment sales
- Double taxation of corporations
- Tax-free reorganizations
Can Your Business Be Operated by Someone Else?
Some businesses cannot survive without the owners trying to do everything themselves; and they have NO key employees to help manage the operations. Even though you may have a stable of loyal customers and great reputation in your specialty, buyers may be concerned whether they themselves can replace the skills and experience of the owner. If you are absolutely vital to the business, efforts should be made to gradually delegate key responsibilities to various staff members. While not every business can be successfully operated by “any buyer”, buyers want a business that can thrive whether you’re at the helm or they are.
Polish Your Business with the Prospective Buyer in Mind
When grooming your business for sale, consider it through the eyes of a prospective purchaser. This will help you show your business in the best light possible. The decision to sell your business will be driven by your personal and financial objectives. However, it’s good business sense to recognize that life and business are unpredictable and that events and opportunities may mean you find yourself pursuing a sale earlier than you had planned. The investment you make in planning will be well worthwhile and give you the peace of mind of knowing that you are able to respond to events quickly and from a position of strength.
This article originally appeared on Dan Smith's SWFL Business Broker website.
Florida Business Broker, Dan Smith, provides business brokerage services throughout Florida; with primary focus on the Southwest Florida region. Dan’s objective is to help those who want to buy or sell a business in Fort Myers, Naples, Punta Gorda, Port Charlotte, Sarasota and Bradenton achieve that goal in an efficient, informed and professional manner.
For more information on selling a Southwest Florida business, businesses for sale, acquisition opportunities and business valuations; contact Florida Business Broker Dan Smith at firstname.lastname@example.org or 239.207.1632 for a free consultation. Visit Dan's Corporate Investment Business Brokers website at www.floridabusinessbrokers.com or his personal website at www.swflbiz4sale.com.
About Bookkeepers Plus
Tony Solgard, a QuickBooks Certified ProAdvisor, is president of Bookkeepers Plus, located in Cape Coral and Bonita Springs, Florida, and providing bookkeeping services to businesses nationwide. His blog helps business owners understand why accounting details are important and to educate them (or whoever they assign to the bookkeeping function) on how to do it right. The blog offers accounting, bookkeeping, and financial management tips, points you toward small business financial resources, and gives a shout out to small businesses with financial success stories. It discusses the pros and cons of using QuickBooks as well as provides tips to maximize your use of QuickBooks.