Selling Your Business

It may be surprising to some that even savvy, successful business people have little or no knowledge about the process of selling a business. In such cases, most sellers should enlist a broker to educate them about the process, properly package the business for sale, locate the right buyer, put the deal together, and see the deal through closing.

If you are thinking of selling, the following primer on the basic issues and process might get you started on the right foot.

Why sell a business?
"Retirement" is the most common reason, but many successful owners sell while in their 40s or 50s to generate cash to pursue new interests.

What is the market for businesses?
There is an active, competitive market for businesses for sale. Most buyers seek business in broad categories then narrow their search by geographic and size considerations. It typically takes six to 12 months to complete the process, from Letter of Intent to close.

Why do people buy businesses?
Many buyers are attracted to the freedom that comes with business ownership, however, the common denominator is that all buyers are driven by generating profits and income. Buyers avoid businesses where there is a substantial risk that the business's goodwill will not transfer to the new owners or are encumbered with external factors such as increased competition, technological obsolescence, etc.

How are businesses valued?
Businesses are valued based largely on their profitability. Other value influencers include the type of business, recent industry trends, assets, and/or liabilities included or excluded from the transaction, geographic desirability, and the existence of risk factors. Valuations typically use formulas that include the corporate taxable income and the "owner's discretionary cash flow" or "Adjusted EBIDTA" - Earnings Before Interest, Depreciation, Taxes and Amortization.

Should you use a broker to sell your business?
Yes. A good broker packages your business to obtain the highest possible price as well as handling all of the details to keep the deal on track and moving forward to settlement. The broker should be local. You should meet him/her in person prior to choosing and check three to five references from recent sales of similar businesses.

Do I need a prospectus?
Yes. Choose a broker willing to work on a "success fee" basis to help create your prospectus, which provides a detailed assessment of your business. The prospectus should only be given to prospective buyers who have signed a Non-Disclosure Agreement. Interested buyers may want to meet with the owner, view the business site, and obtain more detailed information. Meetings should be confidential and conducted off the premises. Any on-site tours should occur after all employees have left.

Should your interest in selling be kept confidential?
Absolutely. Once the deal is consummated, employees, vendors, and other interested parties should be notified in a post-closing meeting where the new owners can discuss their business plans.

What is the selling process like?
Offers typically arrive in the form of a Letter of Intent, which is a non-binding document that describes the basic terms of the proposed transaction. The closing is typically contingent upon successful completion of the buyers due diligence study, which is a short period of time (no longer than 30 days) where the buyer examines the seller's finances. If buyer wants to proceed, the two parties execute the Purchase Agreement, which is the binding, legal document that describes the transaction and includes the business's financial statements and other documents, which become part of the contract and settlement package. You should retain a lawyer and accountant to review and evaluate the Purchase Agreement.

What happens after the closing?
If all goes smoothly, you should be able to "cash out" at closing. Often times arrangements are made for the seller to stay with the company for a period of time after the sale.

When is a good time to sell?
Sellers need to be cognizant of the current lending and economic climate, interest rates, and capital gains taxes and balance them against their personal goals as part of the decision making process.

Selling a business is the end of one journey and often the beginning of a new adventure. The business should be prepared and packaged in a manner calculated to achieve the highest attainable price. The selling process should be managed in a way that maintains confidentiality and doesn't interfere with day-to-day operations of the business. The transition to new ownership should be structured in a manner that ensures the continued health and viability of the business for both the employees and the new owners.

[Adapted from "Selling Your Business: How the Process Works," by Don Naideck and Bill Blumberg, for Mechanical Engineering, July 2007.]

Selling a business is the end of one journey and often the beginning of a new adventure.