EcommerceBytes-Update, Number 252 - December 06, 2009 - ISSN 1528-6703     3 of 7

Going Out of Business Part 2: Selling Your Business for Top Dollar

By Barbara Weltman

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There are many reasons why you may close your business, and in Part 1 of this series, author Barbara Weltman discussed your options when you don't have a choice in the matter ("Going Out of Business Part 1 - Shutting Down When There's No Choice," link). Today, she tackles, "Selling Your Business for Top Dollar."

Maybe personal reasons, such as retirement or a desire to do something different, say it's time to go. Or maybe you are being pursued by an interested buyer. Make your departure count the most - financially speaking - by getting the best price for your company. Here are some points to help you understand the process.

Lay the Ground Work
The value of what you have to sell depends on how well you've developed your business. Prospective buyers are going to check you out thoroughly (this is referred as due diligence), so be prepared.

Prospective buyers want to look not only at your operations and sales figures; if they're serious about going forward they'll demand to see your books (this generally happens only after a particular buyer signs a letter of intent). The financial story you tell with your books starts years before you even consider a sale.

Caution: Some business owners fail to record all of their revenue because they keep sloppy books or are trying to hide income to minimize taxes. Besides the obvious tax evasion issue, inaccurate or incomplete books can undermine your ability to get top dollar for the sale of your company. Unless the numbers in your books support your claims (you say your company is generating $500,000 in revenue but your books say only $100,000), a buyer won't pay what could have been an attractive price for your company.

Valuation
Your business is worth more than the desks, computers, and bank account you have. A company's value includes many intangibles - your brand, your customer list, your earning power, and more. What's your business worth? You need to have a good idea so you can ask an appropriate price.

You can get a rough idea about the value of your business using a free online tool from BizEquity. Enter some general financial information about your business for the past three years and learn approximately where you stand. Or you can purchase inexpensive software that will generate a business appraisal based on the data you input.

For a personalized valuation, you'll need to turn to a valuation expert. Your accountant may be able to provide some insight, based on your numbers. Or you may want to use someone who specializes in valuation. In this case, expect to pay $5,000 and up for a complete report, depending on the complexity of your business situation, or as little as $1,000 for a preliminary report of a simple business. Find licensed valuation experts from:

Business Brokers
Should you try to sell the company yourself or use an expert? Like selling a home, some owners have success doing it on their own, but unless a suitor comes calling for you, most sellers use a broker.

Do It Yourself. If you go it alone, first look within your organization for a buyer. A relative or a key employee may be itching to take over your company; just give him or her the chance.

Finding strangers who may have an interest in buying your business takes effort on your part. Consider using an online business posting site, such as BusinessBroker.net or eBusiness For Sale By Owner.

Business Brokers. If you want a pro to find you prospects and vet them so you eliminate the tire-kickers, work with a business broker. This person acts as your agent to find you suitable people interested in buying your business. Expect to pay a broker an hourly fee, a retainer, or a success fee, which is a commission based on the sale price of your business when the sale closes; a commission is the most common payment arrangement. The commission ranges from 5% to 12%, with the rate for most small business sales somewhere around 10%. Note: Some states require business brokers to be licensed, but most do not, so use caution before you work with anyone.

Financing
How will you get paid? Most sellers dream of receiving a certified check for the full purchase price on the day they hand over the keys. The reality is that many business purchases are paid over time and can involve payments other than cash.

Installment sales. In today's tight credit market, in order to swing the deal, you may be forced to become the banker for the transaction. Instead of obtaining conventional financing, the buyer may look to you. If you're willing to get paid out over time, you may not only ensure a sale, but also obtain a tax advantage. By getting paid in installments, you'll be able to spread the tax on your gain over the years in which you receive payments. Of course, you'll need to take legal steps that allow you to recoup the business if the buyer fails to make all of the payments.

Commercial funding. If your buyer is seeking a bank loan and you aren't willing or able to make an installment sale, get ready to be patient. It may take some time before a buyer can arrange for financing today, if at all. Should one prospect's financing options fail, you'll have to start all over again looking for another potential buyer.

Other payment methods. If you're bought out by a public company, you may be paid in stock, cash, or a combination of both. Here, the transaction can move more quickly than for a buyer seeking conventional financing, but you'll be restricted on your ability to sell the stock you receive.

Bottom line
Before you agree to a sale, be sure you bring in your advisors - your accountant and attorney - who can help you review the terms of the sale and be sure you protect your interests. The process - from the moment you decide to sell until you close the deal - could take a couple of months or much longer, so be prepared to continue running your business well throughout this period.

About the author:

Barbara Weltman is an attorney, prolific author with such titles as "J.K. Lasser's Small Business Taxes and The Complete Idiot's Guide to Starting a Home-Based Business," and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of "Idea of the Day(R)" and monthly e-newsletter "Big Ideas for Small Business(R)" at http://www.barbaraweltman.com and host of "Build Your Business" radio. Follow her on Twitter: @BarbaraWeltman.
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