If you have decided to sell your company, you should first be prepared for it. Whether you’re switching professions, retiring, or looking to invest in a new potentially lucrative opportunity, there are some questions everyone needs to ask before selling a business. In this article, we have gathered the most important inquiries you will need to make if you want to ensure that you’ll handle this situation the best you can.
How to prepare for selling a business?
Before even trying to find buyers, you need to make sure that your business is in a presentable state. Getting prepared for selling your business is something that you must do if you want to make the most out of it. Usually, this means that you’ll have to undergo two years’ worth (or more) of preparations before your company is ready to attract the best deals.
During the preparation period, you’ll have to make sure that your books are in order. Tax returns for the past few years should be available for serious buyers to examine. The same goes for the financial projections, presenting possible directions for your company’s future development. In order to avoid worrying about whether potential acquirers will leak this information, prepare a non-disclosure agreement for them to sign.
Basically, buyers are looking to have quick and easy access to your books. If they are not clean and readily available, they’ll most likely deem your business not serious enough, and they will move on to the next opportunity.
Another way to discourage potential buyers is by not dealing with your company’s weaknesses on time. The more weak points your business has, the less likely will you get a good deal.
Debts can be especially alarming to buyers, so do what you can to pay them off before putting your company on the market. Even if you do come to an agreement, buyers will usually ask you to pay off your company’s debts with the money you’ve earned from selling it. So, if it is possible to do so, handling your debts sooner rather than later is smart, as it will also get you a better deal.
In a situation when you can’t fix all the weaknesses, it’s a good idea to be upfront about it. There’s a good chance that the deal will fall through if potential buyers find out that you’ve been hiding things from them. What’s more, if you have a solid plan on overcoming these flaws, weaknesses sometimes won’t be seen as such a big issue in the buyers’ eyes.
How to determine your company’s value?
Once you’ve prepared your business for selling, you’ll need to determine its value so that you can avoid getting (much) less money than what your company is worth. There are several ways to determine your company’s value:
– Calculate the total value of your inventory, your equipment, and all other assets. By doing so (while considering any unpaid debts), you’ll get a starting figure that will need to be further adjusted.
– Think about your annual revenue. If your company is more successful in terms of revenue than other similar businesses, this means that your company’s value is higher as well. To find out how your business stands compared to similar companies, you might need the help of a reliable business broker.
– Determining the correct price earning ratio (P/E) and then multiplying that number with the earnings you expect your company to receive will provide you with a solid figure on which to base the negotiations.
– Finally, don’t just think in terms of numbers. Perhaps your company has an excellent location, or acquiring it would be strategically very useful to potential buyers. If that’s the case, that could provide you with substantial leverage.
Should you hire a business broker?
Before selling a business, decide whether you should hire a business broker to help you out. As we said, business brokers can help you determine your business’ value. However, they are usually instrumental in other ways too.
For starters, business brokers can find you potential buyers. Even if some buyers are already interested, it can’t be bad to have more options. What’s more, brokers can guide you through the entire process. They can answer all the questions you have before selling a business, and they can make sure that everything is proceeding the way it should.
If you don’t have much experience, their help can be invaluable. Not only will you learn from them, but you’ll be able to spend more time on running and preparing your business before selling it, in turn, increasing the value of your company and the profit that you’ll receive.
The only drawback is that business brokers typically charge 10 percent of the amount you receive for your business. Depending on your situation, that could be too much. On the other hand, if you can afford them, it’s always useful to have qualified brokers by your side.
What to do after selling your company?
Once you’ve found the right buyer, it’s time to ask yourself what your responsibilities will be after selling your business.
Unless you are starting a new business venture, such as opening a moving company in the US, the acquirer will most likely want you to stay at your company for a specific time. This is important to the new owners because you know how the company works, and you can usually greatly ease the transition.
You can either stay as a hired employee (with a salary, insurance, and other benefits) or as a hired consultant working for a specific fee.
Apart from this, the new owner could also want you to keep running the company, even though you no longer own it. Of course, whether one of these options will be right for you depends on your upcoming business opportunities, as well as personal factors.
What are the tax implications?
Finally, before selling a business, you should also be aware of the tax implications. Depending on how long you’ve owned the company, you could be paying a 15 percent tax (if you were the owner for more than one year) or a 20 percent tax.
Whatever the case, if you won’t use the money you’ve earned as capital right away, it could be useful to invest it by placing it into retirement accounts or by utilizing other tax beneficial savings. Doing so will work to your advantage in the long run, as these accounts are tax-favored.