Selling My Business: 3 Things I Wish I Knew
by Steve Wright Ph.d
Every day we meet with business owners thinking about selling their business. After years of sacrifice, personal investment, and long hours they have made the decision to exit their business.
Selling a business is both an economic and an emotional decision. One owner that we are working with has owned his local business for fifty-four years. He said, “I had never thought about selling my business until I turned 84.” This gentleman enjoyed serving his community, his work and the money he generated through his craft.
Why Do Business Owners Sell Their Businesses
There are many factors that lead to a business owner wanting to sell their business. Retirement, health, burn out, new competition, family issues, the economy, and many other factors are given when we meet with business owners.
Business owners are also very savvy and they understand the bottom line. The reason they might be selling never gets in the way of a more important question. “If I sell my business, how much will I make?”
Every business owner is hoping for a big payout and they want to know how much is their business worth. Business industries are each valued differently and an honest and accurate valuation should take place with the help of a professional business broker. Banks require an independent professional appraisal on commercial property for a reason.
3 Things You Should Know Before Selling Your Business
My dad used to tell me, “You don’t know what you don’t know.” Understanding the buyer's side, knowing the steps to selling a business and knowing how to maximize profit from a business sale are all important things to know prior to selling.
1. Buyer Interest- Every buyer that we work with wants to know one thing about the businesses that we are selling. “If I buy this business, what will my income be?” The answer to this question is found in your Profit and Loss Statement.
Businesses are not sold on future potential nor are they valued on your best year of earnings, seven years earlier. Why is this important to know? Many business buyers need a loan to buy a business and the SBA and banks are typically looking for a 1.2 debt-service ratio.
What is the debt-service ratio? This ratio basically tells the bank how well this business can pay its loan back. In other words, the true valuation of your business is greatly determined by the seller's discretionary earnings.
How much is your business really worth? The business buyer and the banker are going to use your salary, plus add-backs to answer this question. If you have been reinvesting profits back into your company to grow it, you may want to begin paying yourself a higher salary. During due diligence, your books will show where all the money is distributed.
2. The Business Sale Process- Most business owners have never sold a business before and they have no idea of the nuanced process of selling their business. The process looks something like this.
The process of selling a business requires attorneys, accountants, landlords, bank/SBA financing and buyer/seller negotiations. The process of selling a business is a full-time job for someone and it is best left to the professionals.
The business selling process requires an accurate and honest valuation, confidential marketing, signed confidentiality agreements, buyer/seller meetings, offers/counteroffers, due diligence, and a legal closing.
Understanding this process helps business owners because they can begin to appreciate the process that the buyer is going through to buy their business. Knowing this process is paramount because many business buyers are first-time business buyers.
Someone has to hold the hand of the buyer on a daily bases because the stress they feel is unlike any stress they have ever felt. This is why approximately 50% of business deals are not completed and fall through. A business owner will want a professional advocating for their business and assisting the business buyer through each and every step. Simply hoping that a business buyer will figure it all out is a recipe for disaster for everyone.
3. Maximizing Profits-
Did you know?
· A business owner makes approximately 30% more when they use the services of a professional business broker?
· The business owner’s salary, plus add-backs greatly impact your business valuation?
· A business is valued up to the day of the closing?
· Recasting from your books is allowed by SBA lending, thus increasing your business valuation?
· Confidential marketing by a preferred business broker often attracts multiple buyers?
· Good books, trained staff, goodwill, great reviews and industry trend all impact the value of a business?
If you need a babysitter for your child or grandchild, would you search for a babysitter on Craigslist and hire the cheapest that you could find? If your mother needed a heart surgeon, would you begin a countywide search for the cheapest heart surgeon? Probably not!
When you get ready to sell your business you need to sit down with a professional business broker. Many business owners have told us that their business is like their child and they are right. The countless hours, the personal sacrifices and the emotional wear cannot be overstated.
What you don’t need is a slick-talking used car salesman that is just looking for another victim. Find a seasoned, honest and a professional business broker that listens well, that cares and someone you can trust.