Selling a business might be intimidating, especially if you’ve never done it before. There are other aspects to consider before proceeding, including the date of the transaction and the logistics.
First and foremost, you must recognize that it is OK to sell your company. Many small business entrepreneurs would struggle with this notion, especially if they developed their firm from the ground up.
Entrepreneurs sell their businesses for several reasons. Selling your business may be highly satisfying, whether you’re ready for retirement, overworked, or just eager to embark on the next chapter of your life. This article will tell you step by step how to sell a business.
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8 steps that will explain how to sell a business
Step 1: Sort Through Your Financial Records
This step is the crucial step to tell you how to sell a business. Before you delve into any prospective situation where selling your small business becomes a reality, you should double-check your bookkeeping. That is not just thoughtful advice for maintaining your sanity during the sales process; it is also critical for negotiating a fair bargain for your organization. When you sell a small business, your financials will be scrutinized by a slew of professionals, including attorneys, accountants, business valuation specialists, and your prospective seller, as well as others who may get involved in the transaction.
Work with your small business accountant to verify that your financial records are in good shape. As part of your sale, you’ll be required to furnish three years’ worth of tax returns and financial records. Also, be prepared to account for any firm income during this period since any missing funds raise a red signal for prospective purchasers. If you’re selling your small business, don’t be startled if you’re asked to produce year-to-date financials: Owners want to know they’re investing in a developing company, not one that’s in difficulty.
Step 2: Engage the Services of a Valuation Expert
There are simple techniques to calculate the worth of your small business if you decide to sell it, but that doesn’t imply they’re the best (or easiest) computations to perform. When selling a small firm, you should anticipate receiving three to six times your current cash flow. That’s a good starting point, but there’s a massive disparity between the low and high ends of this spectrum, especially when other factors are taken into account, such as the market for comparable sales and overall industry expectations.
Third-party evaluators might assist you in obtaining a more exact value. These firms will assist you in determining the true worth of your company based on sales, revenue, outstanding bills, inventory, and debts for a flat cost. Furthermore, a third-party valuation reduces the danger that a seller may fight with you about your company’s valuation because you’ve hired a professional to assist you in determining a reasonable price based on the company’s true worth and market circumstances.
Step 3: Create an Exit Strategy
Create an Exit Strategy is an important step of How to sell a business. Savvy business owners should have a clear strategy in place for how they want to wind down their engagement in a firm they own once it is sold. Even better, every small business owner should have a backup plan in place if they have to part ways with their firm abruptly or are put into a position in which selling is the best (if unexpected) option.
When you’ve established your company to outperform your competitors in terms of financial strength, market stature, or long-term survival, you should have a strategy in place for how you’ll sell and how this choice will affect your finances.
Every exit strategy should include the following elements: a succession plan for who will take over day-to-day operations if you sell (and the buyer keeps the existing staff), an understanding of what potential pitfalls or pain points exist and how to correct or manage them, and an estimate of how much you’d need to make from the sale to cover your family finances.
Every exit strategy should include the following elements: a succession plan for who will take over day-to-day operations if you sell (and the buyer keeps the existing staff), an understanding of what potential pitfalls or pain points exist and how to correct or manage them, and an estimate of how much you’d need to make from the sale to cover your family finances.
Step 4: Identify Genuine (and Suspicious) Buyers
Not every offer to acquire your company will be made in good faith. When it comes to selling a small firm, owners must provide a wealth of sensitive financial and private information.
These facts are priceless to your rivals and might assist them in gaining deeper insights into your business if their offer isn’t genuine. If you are overly transparent early in the process, you risk revealing information to a competitor without making a sale. The same is true if you attempt to go it alone and do not enlist the help of a third party to secure your data.
When you receive an offer to buy your firm, you should understand who you’re dealing with and how serious they are about closing the deal.
Of course, not every business rival will have malicious intentions, but it’s crucial to recognize who you’re working with and if the buyer’s objectives appear to be in line with the offer they make. A non-disclosure agreement is one approach to help protect your secrets. NDAs prohibit buyers and sellers from utilizing sensitive information against one another and ban the transmission of information to other parties for the duration of the NDA. Consider seeking the assistance of an attorney to act as an arbitrator. Legal practitioners frequently retain sensitive papers in their offices and only enable parties to examine these materials on their premises. This protects you against someone looking into your finances without your knowledge.
Identifying the genuine buyer would be a difficult step in the process of how to sell a business.
Step 5: Make an Effort to Increase Sales
There’s a reason why individuals clean up their secondhand automobiles before selling them. Making your asset seem as good as possible before selling it will help you get a higher asking price. The same may be said when selling a small firm. If you can demonstrate that your sales increase as you prepare to depart, you’ll convince potential buyers that your firm is in good financial form and has lots of room to develop. As a result, you may command a more excellent selling price.
Invest a bit more time and effort into increasing your sales through additional marketing, advertising, or referral programs with existing clients.
When you’re about to close a deal, this can assist you in boosting your sales results. Furthermore, it places your buyer in a solid position to maintain momentum once they take over the reins.
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Step 6: Find a Sales Representative
When we say sales professionals, we don’t mean those who assist you bring in new clients and income. Instead, we’re talking about locating a business broker who can assist you in navigating the process of selling your firm. Just as you are an expert in your field, business brokers are when it comes to finding their clients great offers when selling a small business.
Business brokers can assist you with all of the significant and tiny duties associated with selling your company. They will evaluate your firm, write a prospectus for purchasers, and explore the market to identify prospective buyers for you. On the buyer’s side, brokers can frequently assist potential buyers in obtaining the funds required to purchase a small firm. To be sure, this assistance is not always inexpensive: Brokers charge between 5% and 10% of the total sale price, so you’ll have to be willing to give up a piece of the pie in return for the extra support.
Step 7: Involve Contracts and Lawyers
Most likely, you already have a lawyer on hand who has assisted you in steering the sale toward conclusion, especially if you have an NDA in place. Because you’re getting closer to the actual sale at this time, you’ll want to have a lawyer on your side to assist you in preparing and analyzing your sales contract. You could, of course, construct your own sales contract, but doing so exposes you to unanticipated complications that could have been avoided with the assistance of legal advice.
If your organization already has a small business lawyer, that’s fantastic. You should check to see if they are skilled and acquainted with contract law, as not all lawyers specialize in the same areas. If your lawyer isn’t an expert in contract law, consider asking for a referral to someone who is. Paying to bring in another lawyer won’t harm nearly as much as paying for any unanticipated repercussions of entering into a less-than-ideal contract with a buyer.
Step 8: Ensure That You Are Paid Up Front
You’re almost to the finish line: Your financials are up to date, you’ve found a buyer, and your contracts are being reviewed and are almost ready to go. You must now attend to the actual sale terms. Check that your agreement includes payment in advance as part of the contract. You’ll want the money upfront for numerous reasons: to allow you to walk away from the business according to your exit strategy, to assist you to pay transaction costs, and to ensure that your buyer has enough money to fulfil their end of the bargain.
A vendor may face several difficulties if they are not paid in full up the advance. You run the danger of your buyer not supplying you with the whole selling amount over time, which only gets more difficult to obtain once the deal is completed and you’re no longer in regular contact with the buyer. Allowing the buyer to pay in instalments exposes you to any financial problems the firm may have under new management. Assume, for example, that the buyer runs out of cash to keep the firm running. In such instances, there simply won’t be enough money to provide you, which implies lengthy legal proceedings or walking away with only a percentage of the total amount owing.
These eight steps will help you in the process of how to sell a business.
Conclusion
This guide thoroughly explained to you how to sell a business.Selling a small business may be just as difficult as establishing one. There are books to settle, funds to keep track of, and pressure to do it in a way that yields the most excellent possible result for your efforts. However, just as you could launch a firm, you can also sell it and walk away with hard-earned wealth. You can assure you’re receiving the most terrific deal possible if you take a few precautionary procedures. You’ll also be able to do it with little difficulty.
