How to Sale a small business: Part One

How to Sale a small business: Part One

It can seem as difficult to sell a small business as it is to launch one. There are accounts to settle, money to monitor, and pressure to accomplish all of this in a way that yields the best results for your efforts. But just as you were able to launch a firm, you can also sell it and pocket the wealth you worked so hard to obtain. You can make sure you’re getting the best offer if you remember to take a few important steps. Additionally, you’ll be able to do it with little difficulty.

Motivations of the seller

Think carefully about your response to these questions before beginning your search for prospective buyers. After all, it takes years of work and dedication to develop your firm, and selling it could be the largest financial choice you ever make. A choice to sell your firm is one that involves emotions, so think about how you’ll feel after losing control of the enterprise. especially if you are personally connected to the company, which is the case for many business owners. Regardless of the sale price, many business owners treat their company like a second family member, thus selling the company can feel like a bereavement.

The following are some typical reasons for selling a business:

  • Need more capital: Businesses require capital to expand, so you may require a new owner with the necessary resources.
  • Retiring: Whether it’s due to your advanced age, a health problem, or just because you’re tired of working so much, you’ve decided to retire.
  • Net worth connected to the firm: It’s typical for a founder’s business to be their largest asset. You might want to consider selling your company to diversify your interests and lower the risk of investing all of your net worth in a single thing.
  • Mature industry: An industry that has reached maturity experiences a decline in overall sales. The market for cameras and film as mobile phones gained popularity is an excellent illustration. Before the company’s value further drops, an owner may elect to sell the company.
  • No obvious successor: A lot of business owners operate their organizations without taking into account the requirement to identify and mentor a successor. You can choose to sell the company rather than taking the time and making the effort to identify a successor.
  • Partnership disagreements: Expanding a business is difficult, and disagreements can arise between owners. Business partners may opt to sell the company and split ways rather than trying to run the company under challenging conditions.
  • Boredom: Lastly, you can just be tired of running your business and want to switch to a different task or interest.

1.2 IDENTIFY YOUR AIM(S) AND FINANCIAL NEEDS

Prior to spending too much time researching every possible route for selling your company, think about your objectives for the deal. Do you wish to close on the sale of your entire share of the business and pocket the proceeds? Do you want to leave the company to your family or to employees? Are you prepared to continue working for three to five years after selling all or part of the company? How crucial is maintaining the brand? How much money do you need?

There are many options for selling your company, and lawyers are often very inventive. Spending time on solutions that don’t meet your goals or budgetary demands, though, is pointless. Take stock of your needs and wants before being seduced by intricate contract structures and alluring tax avoidance techniques. Talk about your future plans with your personal financial advisor as you prepare to sell your business. What are your income needs? Do you intend to make a significant purchase? This will enable you to decide how much cash you require from the sale of your firm and whether to weigh the advantages and disadvantages of other scenarios, such as an instalment sale.

You’re in the midst of selling your company, but the transaction has not yet been completed. Closed deals often take 3 to 12 months to complete. Because so much could go wrong during that period, maintain your focus and take care not to pre-spend projected profits or mentally give up before the finish line. The business must proceed as planned while an active deal is being processed. Even with an advising team, selling a business takes time for business owners. However, it’s crucial to make sure you meet your sales expectations, profitability targets, and other important financial measures throughout this period.

1.3 EFFECTIVE PLANNING

The future structure of your organization might take a variety of shapes, and there are a number of strategies you can implement to get ready for a successor:

  • Promote from within: You can choose and mentor a member of your present management group who will take over the company after you have retired. The manager could be a CEO who will answer to the ownership group rather than an owner, who is not always the case. Maintaining ties with clients, partners, and staff is made easier through internal promotions.
  • Buy/sell agreements: Owners can establish a contract with current business partners or a prospective outside buyer that specifies how the future selling price will be determined. For instance, a partnership buy/sell agreement can provide that the price to buy out the other partner is three times yearly revenues. The sale procedure is accelerated by these agreements.
  • Employee Stock Ownership Plans (ESOP): An ESOP enables business managers and other employees to lay money aside in a trust to someday purchase the firm from an owner, and the agreement often includes a measure to determine the sale price (multiple of sales, earnings, etc.). A major issue with ESOPs is that owners may desire to sell before the plan is completely funded because the employees require time to accrue the assets.

Even though succession planning takes time, having one in place can prevent a forced sale. A forced sale happens when the owner is coerced into doing so or when the owner’s heirs attempt to sell the business. In a forced sale, the seller has no leverage and is likely to earn far less money for the company after the deal is done. Even if you don’t intend to sell the company for a while, invest some work into creating a succession plan.

1.4 RAISE IN BUSINESS VALUE PRIOR TO A SALE

You can take proactive measures to raise the worth of your firm in order to maximize the price you receive for it. Increasing a company’s value leads to more profits while you are the owner and supports a higher asking price when you decide to sell.

Start by conducting a SWOT analysis of your company. You can list difficulties in each of the four categories—SWOT stands for strengths, weaknesses, opportunities, and threats. Ask for criticism, share your SWOT analysis with your team, and get advice from other employees.

Here are some actions you may do to raise the worth of your business:

  • Brand awareness: A lot of us purchase goods from a certain brand, like Apple iPhones or Tide laundry detergent. Increase consumer awareness of your business by working with a marketing company. Additionally, it makes you stand out from the competition and helps you defend your moat from threats from them.
  • Stable client base: Improve your business to boost the revenue you bring in from repeat customers. A consistent customer base that keeps purchasing your goods over time might raise the value of your business.
  • Disruption: Developing a disruptive product or service may be the most challenging—and financially rewarding—change you can make. For instance, Uber successfully disrupted the taxi industry thanks to the owner’s innovative idea.
  • Close unprofitable division: Make the difficult decision to shut down an unproductive corporate division or product line. In the short term, your choice might cause you to cut back on staff, but you’ll get rid of a part of your company that’s hurting your total profit margins.
  • Increase sales and cost allocation: Every firm should produce a budget each year, and your budget should include budgeted expenditures and prices for sales. Compare your actual costs and sales prices to your budget each month, and look into any discrepancies (also called variances). You can discover strategies for raising your pricing and cutting expenses.
  • Investments: Investing in worker training and technology will benefit your company in the long run. Both investment types can aid in your business’s ability to function more profitably.
  • Division of duties: To protect assets from employee theft, apply the accounting principle known as segregation of duties. Think about managing money to help you visualize this idea. The owner has the power to sign checks, and only one person, perhaps an administrative assistant, should have physical custody of the cheque book. The bank statement is reconciled by a third party, the accountant. Collaborate with an accountant to set up systems that will stop theft.

Consider putting all of these suggestions into practise to reduce expenses, improve productivity, and boost profitability. You’ll gain financially, and a potential buyer will find your company more alluring.

1.5 KNOW YOUR NUMBERS

Organizing your company’s finances is the first step. Clean up QuickBooks, make financial estimates, and get ready key industry indicators. Recognize the numbers. What is the company’s financial situation? Remaining obligations? relative increases in net income and gross sales? Customer count and average size? conformity to your future projections?

Again, it is preferable to begin as soon as possible to give yourself time to acclimate. You might refinance, pay off debt, or cash out minority owners using cash. Even if you don’t need to make any significant adjustments, disorganized or unfinished books can ruin the sale before it even begins. To assist buyers feel confident, it might also be worthwhile to think about having your financials independently audited.

Assemble your advisory group.

It’s essential to have a group of reliable consultants by your side while selling a firm. The reason is that you probably haven’t sold a firm before and aren’t likely to do it again. We have no idea of what we are unaware of, and you only have one chance to get this right. Set up your team of business and personal consultants in advance to help with the selling strategy. A business broker/investment banker, valuation specialist, accountant, tax advisor, and transaction/M&A attorney could be on your team of business advisors. Your financial advisor, estate planning lawyer, and CPA/tax advisor should all be involved in the process on a personal level.

Working with a team of specialists who can guide you through your alternatives is essential because there are many complex factors to take into account, such as the deal’s structure, strategies to keep key staff, tax planning, cash flow planning after the close, etc.

How much is your company worth?

Work with a valuation specialist, business broker, or investment banker to comprehend the actual market value of your company. Consider asking what buyers would be willing to pay right now while thinking about how to sell your firm. Discussing various projected valuations under various selling structures could also be useful. For instance, if the company were sold to a rival, the value of the company under an employee stock ownership plan (ESOP) probably wouldn’t be as high. Similar to selling a non-controlling interest in the company, a full acquisition would be preferable. It’s useful to think about how deal structure can effect valuation as you and your advisory team determine the optimal strategy for selling your business.

1.6 RULES OF THE ROAD FOR ACCOUNTING

There are various reasons why it’s crucial that you follow a clearly defined accounting procedure while posting transactions and creating financial statements, including:

1 Consistency: You will consistently produce correct accounting data if you use the same procedure each month. If you utilise the same system every month, you’re less likely to forget about a particular group of transactions. Additionally, you’ll reduce the likelihood of mistakes or discrepancies. If a potential buyer believes your process is well-defined, they will be more likely to trust your financial results. Utilizing a standardised procedure ensures that your results are similar from one month to the next and from one year to the next. Consider, for instance, that you annually post depreciation expense on fixed assets in accordance with a documented policy. Because you follow the same procedure each month, any trends you notice in your depreciation costs are more trustworthy. Thirdly, a trustworthy accounting system makes it simpler for an impartial CPA firm to audit your financial accounts. Imagine, for instance, that an auditor is checking your inventory balance. Your system makes sure that every inventory transaction is accurately documented and that it is simple to find the accompanying paperwork. Because of this, you may respond to the auditor’s inquiries swiftly and devote less time to audit-related concerns.

Here are some last-minute accounting guidelines to bear in mind:

  • Financial statements: Financial statements for at least the last three years will be requested by prospective buyers, therefore the accounting advice provided here should be applied to earlier years as well.
  • Goodwill: The price paid for an asset beyond its fair market worth is referred to as goodwill. The excess amount paid over fair market value when a firm purchases a company, a product line, or intellectual property (patent, copyright), is recorded as goodwill in the financial accounts. But keep in mind that internally created intellectual property is not covered by the goodwill. They are deducted as they are incurred.
  • Tax returns: Your business tax returns for prior years will also be given, and your returns must abide by all applicable tax regulations.
  • Getting assistance: You should deal with an accountant from the moment your business is founded, and every business owner should collaborate with a CPA. A CPA can ensure that your accounting is on track and that your records adhere to tax and accounting regulations.

Even if you don’t have immediate plans to sell your business, make an effort to abide by these accounting regulations. Making adjustments today will make the process of selling your firm much simpler in the future.

1.7 Procedures Manual: How to Do What You Do,

Your company’s capacity for efficient operations and the effective use of market knowledge could be one feature that draws a buyer. Your company will be more appealing to a buyer if you document your business procedures in a manual. Keep a record of the steps your company takes to execute typical activities, along with who handles each stage. The manual should be available to all members of your staff because it clears up any misunderstandings on the proper way to carry out a certain duty. Assume your accounting programme enables you to send each client an invoice by email automatically. Your team will be able to process invoices accurately if you clearly outline how the software is configured and who has the authority to make modifications to the invoicing system.

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