Positioning your business for sale
From organizing your finances to hiring a broker, learn what steps you should take to prepare your business for a successful sale.
After years of building your business and watching it grow, you'll want to show it in the best possible light – especially if you decide to put it up for sale.
However, selling your business takes work. Pre-planning can not only help you relieve the stress associated with a sale – it can also help you attract the highest purchase price.
Consider these initial steps to position your business for sale:
Step one: Assess your business's condition
Be brutally honest – this is no time for rose-tinted glasses. You want to put your business in show condition. For example, in the case of a business with a physical location, determine if there's any physical wear and tear to the business's assets that could cause a potential buyer to be concerned about resale value and deferred maintenance costs. Then, complete any necessary repairs, upgrades, or improvements, including cosmetic updates. A coat of paint, some landscaping, and deep cleaning can create a positive first impression that translates into a higher sale price.
Step two: Organize your finances
While exterior factors are important for some businesses, a potential buyer will pay even closer attention to your business's finances. Gather financial records going back at least three years, including tax returns, expense records, client lists, and lease agreements. Also, make sure shareholder agreements and employee records are in order to give interested buyers an accurate view of the business. A best practice is to have your financial statements audited. Eliminate any expenses that are not necessary for the continuing business operations of the company. Earnings are a critical factor in determining the value of your business, so you want to demonstrate their full horse power.
Step three: Resolve legal issues
Additionally, be sure to clear up any pending legal disputes and have your attorney review any operational areas with legal implications. For instance, do you have environmental or intellectual property concerns? Ask your attorney what needs to be disclosed during due diligence and how to address issues that have a significant liability potential. Buyers will be more likely to purchase a business when legal matters are disclosed up front.
Step four: Determine the value of your business
Next, find out the value of your business. Many business owners obtain a business valuation from a reputable third party (such as a business broker or valuation service) prior to putting the business on the market. Wells Fargo's Business Advisory Services offers valuation services through Wells Fargo Bank, N.A.
Valuing a business is part science, part art. Many variables affect the selling price. You frequently hear sales prices expressed as a formula (i.e., X times earnings). But don't rely on rules of thumb. There are several types of earnings measurements, such as net income and earnings before interest, taxes, depreciation, and amortization (EBITDA). Your selling price will vary depending on market conditions and your business's specific circumstances.
Step five: Evaluate your sales options
Determine whether you're going to work with a business broker or independently. Wells Fargo Business Advisory Services offers M&A services to clients through Wells Fargo Advisors. There are pros and cons to both options:
Hiring a broker
Pro: You have an experienced negotiator on your side to guide you from start to finish. Brokers actively market your business and know where to find qualified buyers.
Con: You have to pay a sales commission – commonly 10%. However, if a broker helps you get a higher price than you could on your own, it can cover the commission and more.
Pro: All earnings from the sale go directly into your pocket. You also have complete control over how and where you market your business, and negotiations with potential buyers.
Con: Selling a business takes work and attention to detail. If you don't have time to commit to the process, you may struggle to do everything by yourself. Start by considering how and where you'll find buyers. Are you going to use a business-for-sale listing website? Word-of-mouth?
Handling a business sale diligently and professionally can help you extract value out of your business and build personal wealth for you and your family. Plus, if you show your potential for business success, it could continue to support your customers and employees for years to come.