International Joint Ventures and Merger & Acquisitions

Things to Consider Before Selling a Business

May 02, 2023

Prepping up your mind to sell your business? Take a tour of this detailed article to make a successful business sell. This article has been curated after performing a thorough market research as well as seeking the advice of experts.

Selling your business is a business itself. AND…before you are all set to sell your business, you should know what it takes to sell it.

Having said that, we completely understand how nerve-racking and emotional this decision and your journey can be but let’s also admit that it’s perfectly okay to move on to the next chapter of your life.

While working with hundreds of businesses in wide variety of industries, we usually get asked is… ‘How long will it take to sell my business?’, and as per our experience and findings, ‘On an average, it takes between six to eleven months to sell a business.’

However, before you start the actual selling process, take a tour of this detailed article that has been curated after performing a thorough market research as well as seeking the advice of experts. This article covers what you will need to understand and implement to make a successful business sell.

So, let’s get started…

1. Get your business valuation done!

Business valuation is the process to determine the current worth of a business. This is executed using objective measures as well as by evaluating all aspects of the business.

Business valuation can also include detailed analysis of the company's management, its capital structure, and future earnings prospects. The tools used for valuation can vary among businesses, industries, and evaluators.

Common approaches to business valuation include:

  • Review of financial statements
  • Discounting cash flow models and similar company comparisons
While some common and popular methods of valuation involve:

  • Time revenue model: Under this method, a stream of revenues generated over a certain period is applied to a multiplier.
  • Earnings multiplier: This method adjusts future profits against cash flow. This later can be invested at the current interest rate over the same period. In simple terms, it adjusts the current P/E ratio to account for current interest rates.
  • Market capitalization: In this method, business valuation is calculated by multiplying the share price of the company by its total number of shares outstanding.
  • Discounted cash flow (DCF) method: This method, like the earnings multiplier, is based on projections of future cash flows. These projections are adjusted to get the current market value of the company.
  • Liquidation value: This is the net cash value that a business will receive when its assets are liquidated, and liabilities are paid off.
  • Book value: This is the value of shareholders’ equity of a business and is derived by subtracting the total liabilities of a company from its total assets.

2. Organizing your finances while maintaining confidentiality

Financial statements when well-organized and reconstructed can maximize the business value in the eyes of prospect buyers.
What buyers actively look for?

  • Three to five years of profit & loss (P&L) statements
  • Bank statements
  • Balance sheets
  • YTD comparison P&L statement
  • Federal income tax returns
Owners who are actively looking to selling their business should timely organize the business’s financial records for the previous three years. These records should be broken down in an easy-to-navigate format.

Always remember - Never give potential buyers raw financial data without a list of adjustments.

For instance...

  • The process of adjusting financial statements to reflect accurate expenses and income is simple and easy as theory. However, the buyer must be familiar with your business to know which adjustments to make.
In this case, practically you can start with your P&L statement and format it in a column-based spreadsheet. Now, separated that into original financial statement numbers, adjustments, and normalized numbers, and finally with notes or explanations. This activity if executed sincerely should be sufficient and accepted for most needs of the buyers.

  • Also, let us assume a buyer requests a YTD financial statement. According to us, we suggest, provide them with the gross sales figures only for the current year. Plus, the buyer must be familiar with your business to know which actual adjustments to make.

3. Determining the business’ selling price

There are four accepted methods that you can refer to determine the right selling price of your business.

a. Return on Investment Method: Your annual net profit is what's left after you pay all expenses, rent, taxes, cost of goods, and salaries. Moreover, you should also deduct the cost to replace you from your annual net profit. This is because a buyer should know what he/she will be left with at the end of the financial year while hiring your replacement.

b. Sales of Comparable Businesses Method: On contrary to the first method, it hardly matters what the ROI is. The way that comes closest to determining the cost is comparing between which businesses like yours that are located in the nearby areas and are sold recently. This process is called comparables in the real estate circles.

c. The Industry Formula Approach: Websites related to financial information services price a business based on "the rule of thumb". For instance, rule of thumb for evaluating a profitable restaurant is that it is worth two-three times its annual profits.

d. Asset Value Approach: It begins by totalling the value of the business assets. In many businesses, the value of the assets also depends upon their location within the business. When you remove them from the business and sell as a generic item, the value drops. However, taking the value of assets into account is appropriate particularly if a business owns valuable trademarks, patents, or copyrights.

4. Finding pre-qualified buyers and assisting with negotiations

Whether you are willing to work with an individual broker, a casual platform, or a specialized site, you have multiple ways to find a buyer for your business.

  • Online listing sites
These online listing sites can be termed as marketplaces specialize in buying and selling businesses. You can create engaging advertisements using templates to attract buyers who can further locate your business by either browsing the site or searching by price, location, industry, or additional mentioned factors.

  • Business brokers
Working with a business broker comes with multiple benefits, especially for those who are categorized as first-time sellers. Some of the benefits include:

  • A broker can assist you to find a buyer while ensuring to maintain company’s confidentiality. On the other hand, you won’t get this benefit of confidentiality if you go for online listing sites.
  • Experienced brokers can immensely help you in marketing your business with the help of their resources and networks.
But, before you seek a potential buyer, be confident that:

  • Your business assets and financial statements are in order. They are also ready for the due diligence process followed by the sales contract.
  • Bank statements, cash flow statements, and accounting documents such as employment agreements must be ready to be assessed.
  • You have a clear exit plan to remain satisfied with the process of selling your business from start to finish.

5. Finalizing legal documents and contracts

As you find the appropriate person to whom you can sell your business, it is strongly advised to get the offer in writing while considering the given below pointers:

  • A simple letter of intent (LOI) is not considered as an official offer.
  • Stock or asset purchase agreement is required to establish the deal.
  • Details in a purchase agreement must include price, terms, due diligence period, due diligence documents, contingencies, and closing date.

Quick Tips

5 dos when selling a business 5 don’ts when selling a business
Plan ahead Don’t choose the price, choose the buyer
Maximize your business value Don’t rush things
Keep a cool head Don’t make yourself irreplaceable
Organize your records Don’t control the relationship with lenders and investors
Expect delays and be patient Get external advice: A business transition is complex and the stakes are high.

If you are prepping up your mind to sell your business, please fill the form given below and one of our experts would write back to understand more and help build up a strategy. This will help maximise the value for your business.

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