There are many reasons why small business owners would want to sell the company they worked so hard to build up. Some common examples include: retirement, changing life priorities or goals, illness or death. But often small business owners are unaware of the sales process and end up making costly mistakes. The following are a few things to consider before you decide to put your business up for sale:
- Get a head start. Since it can take up to two years to sell a business, it is recommended that where possible you start the process a year or two before you want to sell the business. Moreover, the lead time gives you the ability to make sure that everything is in order with your debt obligations as well as overall operations.
- Profitability is desirable. A profitable business is eminently sales-worthy. If your business has been in the black, you will have a much easier time passing it on for obvious reasons. To that end, a business owner should evaluate and resolve any operational problems so it will help to put the company in the best position possible.
- Hire professional support. The presence of business broker is integral to preparing a business for sale in nearly every case. The broker will also determine the business’s value, market it, and negotiate for the best price. Moreover, before the business valuation, or cost assessment, the broker can help with recasting. Recasting, is a widely accepted practice that means modifying financial statements to demonstrate the business’s earning potential. For example, small businesses might include family members on payroll, or redirect profits into capital improvements. Recasting adds back this money as profits on the business’s balance sheet. Hiring a business attorney or another qualified professional to inspect the potential buyers’ financial statements will help to ensure that they can afford the business.
- Get the right documentation. Several documents are required for the valuation. As a rule, the broker will need tax returns from the past five years, internal financial statements from the past five years, and year-to-date financial information. The recasted financial statement should show discretionary income for each of the past five years.
- Set goals. As mentioned above, the sales process involves several steps to which the business owner should give consideration and budget time. After the valuation is complete,a sales memorandum must be written. The memorandum should include a business history, list of employees and job description, size and location of customer base, and information about the business’s location. Next, the broker has to market the business to qualified buyers.
- Consider your tax obligations. Once a dependable buyer is in place, the broker will structure the sale to minimize the seller’s tax burden. Usually, small businesses benefit most from an asset sale instead of a business entity sale.