Selling a Small Business? Take the Right Steps
The best advice for small-business owners pondering the sale of their company sounds more like a yoga principle than a business theory: Free your mind.
First-time sellers may find the process exciting, confusing and frustrating all at the same time. To maximize their businesses' value, sellers should expect to spend some capital. But most important, they should be nimble in their thinking, ready to listen to multiple opinions and willing to consider creative ideas.
By approaching the transaction the right way, sellers may find a more welcoming market and a better deal.
“Buyers are coming out of the woodwork because so many are unemployed,” said Tom West, founder of Business Brokerage Press. He explained that many management-level workers are looking for new opportunities out of worry that their jobs aren’t coming back.
Recession or not, small businesses change hands frequently. The rate is hard to pin down because plenty of sales take place outside the brokerage world, but West, who has been feeding financial information to business brokers for more than 25 years, said the unofficial estimate is that one in five businesses sells each year.
Whether to use a broker
Once a business owner decides to sell, he or she must decide whether to use a broker. Brokers usher owners through the sales process and take a portion of the sales price as their commission.
“Sellers don’t have a good grasp of the process that’s going to be involved. They don’t usually have a grasp of how the market might respond,” said Rob Firestone, owner of Oklahoma Corporate Acquisitions in Tulsa.
Firestone said he begins with a long discussion with the potential seller.
“We’re trying to set the stage for a realistic valuation. There are plenty of opinions — CPAs’, tax and transaction attorneys’, the buyer’s — that will determine how much a company is worth,” Firestone said.
Brokers offer a level of discretion during the sale process, which can be crucial for a company. Word of a sale can trigger anxiety or fear among employees, vendors and customers. Such a reaction can cramp performance at the most crucial juncture.
What’s it worth?
Whether using a broker or not, once sellers have decided to sell, it’s time to evaluate the product.
“If you haven’t mowed the lawn and pulled the weeds, you need to get that done,” said Grover Rutter, a Findlay, Ohio, CPA who specializes in business valuations.
Both Rutter and Firestone emphasized the problems with antiquated or unsophisticated accounting and administration systems. They’re a turnoff, they said. Private equity firms , in particular, seek updated technology coupled with solid management and process documentation, Firestone said. They want to step on the gas pedal from day one.
While the recession may spawn lots of buyers, it’s also leaving a tight credit market.
“If you can’t get them financed , you can’t get them sold,” said Rutter. Sellers should prepare to carry some of the debt in any transaction. The dream of leaving the closing table with the asking price in cash is just that — a dream, Rutter said.
Owners preparing to sell their companies should start planning in the previous tax year. The way taxes are filed and income is reported could greatly affect the value of the business, Rutter notes. In fact, buyers and lenders rely on historical tax records to calculate a company’s worth. Fiddling with the books to avoid paying income taxes, for example, can turn into a costly mistake, leaving the business is under-valuated based on reported income.
The bottom line: Selling a business is far from impossible, but it’s no cakewalk. Give-and-take rules the negotiating table. And the give can be hard to swallow. So before jumping in, give yourself a good stretch and breathe deeply.