Closing down and selling a business can be a long and difficult process. You have to take some important steps, follow the guidelines, and plan an exit strategy accordingly. You might have to acquire the services of a business expert or an advocate. Besides, seeking advice from a lawyer and business professionals such as bankers, accountants, and IRS can prove extremely useful.
Best Steps And Guide To Follow For Selling A Business
The holistic process of selling can be mentally demanding and is certainly not everybody’s cup of tea. Let’s dive straight into the selling business checklist!
- Defining goals and exit strategies
- Determining the valuation range
- Enhancing business value before the sale
- Gathering and presenting financial information
- Compiling diligent information
- Targeting buyers
- Screening potential buyers
- Negotiating the deal
- Transaction documents, an intent letter, and interest indication
- Business Transition
1- Defining Goals And Exit Strategies
When selling a business, an owner has an extensive range of transaction choices to proceed with selling. The owners should understand all these options in detail that can affect the final price to be paid by the business broker or the end-buyer. The owner’s objectives mostly drive the buyer’s nature that a company desires. The buyers’ nature generally comes down to three categories. Each type of buyer has been discussed below:
- Employee Purchase: An owner can sell the business to one of its employees or an insider. They may follow the Employee Ownership Plan, which allows employees to take part in a business’s ownership. When the company’s integral team is the best option for the future, this option will attract the business’s business’s growth and success for the future.
- Financial Buyers: Financial buyers create a huge part of the buyer pool. They use debt financing aimed at 55% to 80% of the total price. Besides, financial buyers look for adequate cash flows to facilitate the debt.
- Strategic Buyers: These buyers interact with other businesses. They tend to purchase companies that are a part of their potential business plans. At times, strategic buyers also pay an amount to acquire the clients or a company’s expertise. Strategic buyers don’t interact with the competitors.
Sellers prefer to sell their business to a certain type of buyer. When selling a business, it is essential to understand the requirements and process of selling, value expectations, and strategic objectives. This includes determining exit strategies, identifying the appropriate acquirers, point of sale, and tax consequences
2- Determining Valuation Range
Deciding on a reasonable value range is critical to the sale process. Owners should keep a realistic value in mind so that both the seller and buyer have the same expectations. Deals will not be closed out if buyers and sellers have entirely different expectations of business value. While a business broker could help both parties reach a mutual agreement, even a highly experienced broker cannot tie up a huge gap.
Several methods can be used to determine the value of a business. Some might acquire valuation experts’ services for aiding them to value their business before listing it for sale. The valuation gives the seller an understanding of business value. A strong buyers’ pool also helps a seller comprehend the market valuation of their business. At the end of the day, the eventual price in the market is determined by potential buyers.
3- Enhancing Business Value Before Sale
Usually, sellers review the business strategic plan and financial status to improve the company’s performance 6 to 12 months before the sale. The business value can be enhanced by focusing on central competencies, reducing expenses, reducing customer concentration, and streamlining processes. Acquiring the services of an experienced advisor who understands the relevant business transaction requirements can be useful in selling.
4- Gathering And Presenting Financial Information
Properly evaluating and presenting the business finances, transaction history, and forthcoming projections is another critical element in the sale process. As owners usually don’t prepare financial business statements for sale purposes, but for tax purposes, it is important to re-cast finances for sellers so that potential buyers get a clear idea and view of the business capabilities. Again, it is important to take enough time to present the financial information to influence the buyers and help them evaluate the business.
5- Compiling Diligent Information
When potential buyers evaluate the business value, they anticipate the facts and records to be accurately documented. It is important to review the governance documents, licensing agreements, permits, leases, employee agreements, etc. If the record and date are not properly organized, it creates a negative image of the business in the buyer’s mind. Subsequently, the process will get delayed.
Properly organized financial information of the company helps you prepare a top-quality business executive summary. The business summary gives an overview of the business, shares its financial information, and describes its target market. The business summary is an ideal way to educate potential buyers.
6- Targeting Buyers
It is a striking fact; the small business has more potential buyers in the market. You and your advisors should possess some resources and tools to search and gain access to the buyers. You have to review customers, strategic buyers, and competitors with a great level of expertise.
This is amongst the most time-intensive features of the sale process. But, this element is a requirement for an effective and successful deal. For getting the best sale price and terms for your business, it is important to reach out to the best buyers.
7- Screening Potential Buyers
A lot of potential buyers expressing interest in business are actually not qualified to acquire the business. You might have to ask some relevant questions from the potential buyers for screening them. Screening buyers will allow you to focus on growing your business before the final point of sale, instead of consuming time interacting with other non-serious or unqualified buyers.
8- Negotiating The Deal
After all the initial process, the business sale would have many professional and financial considerations for you. The final purchase price is only one of the components of this holistic process. Other factors and terms for buying and selling include earn-out, stock sale vs. asset sale, financing, security, liabilities anticipated by the buyer, assets retention, contracts, equity ownership, and other agreements.
9- Transaction Documents, Intent Letter, And Interest Indication
Three documents are used by buyers to express interest in business acquisition: the Purchase Agreement, the IOI (Indication of Interest), and the LOI (Letter of Intent). The IOI provides proposal terms, structure, and transaction valuation. Based on the IOI, the owner can decide whether to move on with that particular buyer.
Intent letters show the seriousness and interest of the buyer. It includes terms of the deal, and an exclusivity period is given for the buyer to move on with the deal or reject during that period. The transaction documents and the purchase agreement is also drafted to outline all transaction details: financial, legal, warranties, representation. The agreement of purchase is the final document, outlining and defining the terms.
10- Business Transition
The business transition period usually involves a co-operation period. At this point, the deal is final, and the seller assists the buyer in business transition.
This includes introductions to vital clients, altering the accounting and financing functions, and understanding other operations, such as trade secrets and proprietary information, to operate the business operations.
All these steps and factors must be considered when selling your business, whether it’s a small business or a large-sized firm. For figuring out your business worth, assets, intellectual property, brand presence, customer information, and future revenue projection is important.
You can formulate a sales agreement when selling a business. But, keep in mind that you should not leave any assets and liabilities, or problems can be created even after the deal is finalized.