Thinking of selling your business someday? Planning on leaving your empire to the kids with a chunk of cash attached? Dreaming of retiring to the sunny beaches of a Caribbean island?
Perhaps you’re planning on doing any (or all) of these things from the sale of your business. And, OK, maybe we’re dreaming a little. Even in New York, the median selling price of a small business is a mere $575,000. (For your own location, check out BizBuySell’s small business listing metrics, by area.)
But, still, selling your business can be a smart decision. Good reasons to sell include: the market telling you it’s the right time; you’re no longer interested; you have dysfunctional relationships with your fellow business owners; or you’re just plain ready to retire.
So, even if you’re establishing a new business but have visions of someday selling it, there are several things to consider.
Some business plans — especially those that require venture capital funding — need an exit plan from the beginning, whether that plan be selling to a larger company or going public. Other business plans, where no sale is planned in the near-future — at least not within the next ten years — may prompt questions about an eventual sale.
One big question here, of course, is when you should actually start planning to sell, Like almost anything else a lawyer will tell you, it depends. So, before you begin that discussion with your lawyer, here are some important things to consider:
1. What the buyer will want
Profitability. This is the most basic requirement. Is the business turning a profit? Will it continue to turn a profit? Is there room for growth in the industry? Does the business have significant debt service obligations? Does the business require significant capital expenditures in the near future?
The answers to these questions will have a profound effect on whether the business will be attractive to potential buyers.
Competitive edge. What makes your business’ products or services different from those of competitors? Does your business simply provide commodities that can be easily and legally copied by competitors? If the products or services aren’t inherently different from those of competitors, does your business have other assets that help differentiate it? Perhaps it’s a juggernaut brand?
Systemization/management structure. Can your business operate without you? Have you systematized — as much as possible — your role in the business? Is there a management structure in place that will allow the business to operate without you?
Scalability. Can the business grow? Or is it dependent upon and limited by trained personnel or professionals who must interact with customers on a deep level in order to be successful?
Culture. Do the business’ key employees understand the more nuanced intangible bases of the business’ success? Can those be easily communicated to and instilled in them?
Apple is a great example of this: The company has a program, Apple University, that seeks to impart the beliefs and principles espoused by the legendary Steve Jobs to both existing and new employees.
2. What the technicalities will be
Even if a business satisfies all of the preceding criteria, there may be any number of technical hurdles that could make it less attractive to potential buyers. Some of these technical issues could actually stop the sale altogether.
Worker classification. Do you classify important members of your workforce as independent contractors, when they are actually employees? When you misclassify what are actually employees, it’s possible the buyer will be subject to substantial liability, tax or otherwise.
Leases. Do the business’s leases permit their being assigned without the consent of landlords? Is moving the business easy should a move be necessary? Buyers won’t likely be interested if they cannot assume the lease and if moving to a new location is difficult.
Long-term supplier contracts. Does the business have long-term contracts with suppliers that contain terms that are worse than what’s available on the market, or worse than the acquirer can negotiate? By the same token, long-term contracts that contain more-than-favorable market terms might be a selling point to increase the value of the business, or at least make it more marketable.
Inefficiencies. Are there multiple people and processes that are inefficient? Increasing efficiencies without decreasing the quality of products or services is a great way to make a business more attractive to potential buyers.
Taxes. Has the business significantly depreciated its capital equipment? If so, buyers might want to purchase the business via an asset sale, which could force you to recognize significantly higher capital gain than would be realized in a stock sale.
If you’re looking to sell, there are still other technical issues worth considering. Always seek the advice of a competent professional when making important legal decisions.
3. What kind of financial professional you’ll work with
If you’re looking to sell your business, you might choose to work with one of two types of intermediary: a business broker or an investment banker. Business brokers generally assist with the sale of businesses ranging in size from $500,000 to $5 million. Investment bankers often won’t get involved unless the business is worth at least the latter figure.
Brokers are more willing than investment bankers to work on a contingency basis, meaning that they only get paid if a deal successfully closes. Investment bankers typically require an initial retainer, monthly payments and a success fee.