There will inevitably come a time when you’re ready to move on from owning and operating your small business. When that time comes, you’ll need to determine your best option for exiting your business. In many (if not most cases), that will mean preparing for someone to acquire your business. Today’s post details some of the considerations and steps you can take to better position your business for a successful acquisition.
The Bigger Your Company, The Less Options You May Have
I know, it seems counterintuitive. But if you think about how many people are willing or able to pay $1M versus $10M for your “small” business, it’s easier to see that the larger your company, the fewer potential buyers there may be. There are simply less people and companies with sufficient capital or that are willing to invest in a larger acquisition. Thus, your options will likely decrease as the value of your business grows. Of course, I’m not suggesting that you should strive to stay small or stunt growth simply to keep your exit options broader, but it’s worth considering that the further your business grows, the less potential buyers you may see.
Plan Ahead; Do Your Own Due Diligence
Buyers do extensive research before agreeing to purchase your business—this phase of the acquisition process is known as “due diligence.” You should also do your own research to make sure your business records are organized, your business’ financial affairs are in order, and you can justify the price you’re asking for. At the very least, you’ll want to have clean financial records for at least three years, which can help increase the buyer’s trust in the financial condition and operating history of your small business.
Another important bit of research you’ll want to do is analyzing the current acquisition market for similar small businesses in your industry. You’ll want to find out what similar businesses to yours have sold or are listed for. There are plenty of online directories where you can search for similar listings based on industry, size, location, etc. This is often a good place to start your research when deciding a reasonable price for your small business. Business brokers can also be a great resource to help you determine the right price for your business based on the current market.
In addition, you’ll want to clean up, or at least disclose, any outstanding claims, potential claims, or other major liabilities of the company.
Scrub the Walls, Mop the Floors
In addition to organizing your financial records and contractual obligations, you’ll want to make sure you take care of your business’ physical properties and other assets. It’s easy to overlook this part of the business while planning to sell your small business; however, it is important to provide the buyer with a quality first impression of your business. Think about selling your car: Not only is it important that the car’s engine has been maintained, but buyers care about the outward appearance of the car. That last thing you want to do when selling your business is to create a bad first impression when the buyer comes to visit your office, warehouse, or other company property. Taking out a loan to do a major face-lift probably isn’t necessary. But a little “spring cleaning” will be well worth your time.
Hear Ye, Hear Ye, “I’m Selling My Business!”
To ensure you attract the greatest number of buyers, you’ll need to spread the word of your sale. One way to do this is to hire an experienced business broker. A business broker will provide exposure and expertise for the sale of your business, and experienced brokers often have a large network of individuals and businesses that could be potential buyers.
If you’re looking to sell your business without the guidance of a business broker, be prepared to spend lots of time marketing your business. Ideally, you’ll put together a comprehensive marketing plan that details how you will target the right audience of potential buyers. You’ll want to figure out where potential buyers are located and market aggressively in those places.
Seller Financing May Attract More Buyers
Seller financing can be an important way to attract buyers. Financial institutions have tightened lending to small businesses, and most banks require seller financing at least in part prior to funding any acquisition. You can consider taking a percentage of the sale in the form of a note that the buyer will pay off over a specified period of time. This means you’ll still be invested in the business, and generally, you’ll want to be actively involved in the transition of the business to the new owner to make sure they are positioned for success and are able to pay off the note.
Patience is Key
Prior to trying to sell your business, you’ll want to make sure you have done extensive research into the market (and your business’ current position within it), your business’ financial condition, and your marketing plan. The more you know about your business and the market, the better you can position yourself for a successful exit.
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