1. Determine a Realistic Price Range
If you price your business too high, you’ll scare away buyers. If you price it too low, you’ll risk selling at a bargain basement discount. Your goal is to figure out a range that’s realistic.
Pricing a business is both an art and a science. There are several methods you can use — and then maybe blend the results. For example, you can base the price on the value of the business’s assets, and add in a sum for the goodwill the business has developed. Or you can see what comparable businesses in your industry and locale have recently sold for. Or you can use an industry formula (for example, a value based on the number of units sold annually or a multiple of average earnings) that will help set a price range.
2. Prepare an Information Memorandum
An information memorandum gives a buyer an insight to your business and details the key components that you are selling. This document is read by the buyer and the decision made on whether to purchase, based largely on the information provided by you. The information memorandum is viewed by the buyers advisors and lenders, thus it needs to be professional, thorough and easily understood.
3. Prepare for a Sale
The getting-ready process, of course, includes sprucing up your business premises — everything should be attractive and orderly. But more important is getting your numbers in good shape. Consider recasting your tax-return numbers for prospective buyers. This can involve, for example, adding back to your profits discretionary expenses such as:
- medical insurance for you and your family
- travel and entertainment
- conventions and trade shows
- expensive cars owned or leased by the business
- club memberships
- subscriptions to magazines, newspapers, and electronic services
- continuing education expenses, and
- salaries and bonuses paid to family members who do not work in the business.
- Interest repayments
- Cars for personal use
- Extraordinary owner superannuation contributions
For instance, let’s say you enjoy travel so you’ve been attending trade shows at attractive locations. You’ve deducted the cost as legitimate business expenses — lowering your tax bill, but also lowering the bottom line. All discretionary spending needs to be detailed and verified by your accountant. This normally comes in the form of a schedule of “add backs”.
4. Seek Potential Buyers
If your business is well known, word that it’s for sale may be enough to bring prospective buyers to your doorstep. Or, possibly someone close to you — an employee, a relative, a friend, a supplier, or a customer — could be an interested and logical prospect.
But finding buyers may not be easy. More likely, you’ll need to reach out to a bigger pool of potential buyers. This often includes putting ads in newspapers, in trade publications, and on business-sale websites.
Sometimes, too, you need keep a low profile in your marketing efforts to avoid alarming customers and suppliers. An intermediary such as a business sale facilitator can help keep information from leaking out prematurely. TGBN has very strict protocols to protect our clients information.
5. Negotiate Your Deal
Once you attract an interested buyer, you need to work out the terms of the sale. Here are some key issues:
- Will you sell your business entity or just its assets?
- Will you keep some of the assets (a car or truck, perhaps) that are currently being used in the business?
- Will the buyer pay you in one lump sum or make installment payments?
- In an installment sale, how large will the down payment be and how long will the buyer be given to pay off the balance?
- After the closing, will you work for the buyer, either as an employee or an independent contractor?
- Will the buyer require you to sign a non-compete agreement that limits your right to work in your current industry?
6. Sign a Heads of Agreement
Once you’ve worked out the key terms with the buyer, you need to put the deal in writing. Among other things, you’ll need to list all of the assets the buyer is purchasing and the value you will assign to those assets for tax purposes and any business contracts the buyer is assuming, including business leases, service contracts. Your agreement should also include protections that assure you’ll get paid the full sale price.
In an installment sale, it makes sense to require the buyer to have a spouse or other cosigner guarantee payment of the balance owed. And, for sure, you’ll want to retain a security interest in the business until the sale price is fully paid. You may even find it prudent to take a lien (a second mortgage) on the buyer’s home or other real estate.
At this point, your solicitor will issue a contract for sale based on the heads of agreement. He or she will negotiate the relevant clauses with the buyers solicitor, organize the exchange of contracts and execute the settlement.
7. Plan for the Closing
The closing is the meeting at which you transfer the business to the buyer. To reduce the chance of last-minute hassles, make a checklist of all the papers you’ll be bringing and all that the buyer is expected to bring. While every sale is different, here’s a list of common documents and items that you may need to bring with you.
- Alarm codes, computer access codes, and safe combinations
- Bill of sale or transfer documents for license, real estate, and vehicles
- Consent of entity owners to sale of assets
- Consulting contract (independent contractor agreement)
- Covenant not to compete (noncompete agreement)
- Customer lists
- Employment contract
- Escrow agreement for post-closing adjustments
- Insurance certificates for the policy covering secured assets
- Keys to file cabinets, premises, and vehicles
- Mortgage or deed of trust
- Owners’ manuals for business equipment
- Security agreement