1. Burn out

2. Health Problems

3. Financial problems

4. Receives an unsolicited offer

5. Untimely death

The sale of your business should be a planned process to yield the you the highest possible price for the company; not a knee-jerk fire sale based on uncontrollable circumstances. 

Start with Your Stop in Mind

A successful exit plan begins preferably 3 years before your targeted exit date. The first step toward creating an exit strategy is to get your personal financial picture in order.  As a business owner and future seller, be sure that you have adequate protection with life insurance, disability insurance and even business interruption insurance to protect your company in the event that a disaster occurs. 

Next, if you haven't already, enlist the services a certified financial planner.  Many sellers largest asset is their business, which can be risky, particularly in a soft economy.  If an owner if forced to sell after several months or years of minimal profitability, the seller will not be able to sell for the maximum price and may not be able to exit with the cash he or she had anticipated.  A planner may recommend building up cash reserves or acquiring real estate to balance out your portfolio.  Regardless of the outcome, without a clear understanding of your personal financial picture, you will not be able to make accurate strategic decisions for the future.

Buyer Hot Buttons

When preparing your business for sale, it is important to understand what exactly buyers are buying.  Most business buyers are first and foremost buying cash flow or net profits.  To demonstrate the financial strength of your business, you will need to provide a potential buyer (at minimum) with 3 years of profit and loss statements, 3 years of federal tax returns, equipment list, inventory list and a copy of the facilities lease. The buyer and his or her advisors will use this information to evaluate the historical trends and project future potential for the business.

Equally important to profitability is the building lease.  When a business changes hands, an important element for a new buyer is to be able to secure a long-term lease, preferably for 5 years with two 5-year options, at market rate or lower.  As a seller, if at all possible, you will not want to assign your existing lease even if the remaining terms would be advantageous for the buyer.   By assigning the lease, you, as the leaseholder will most likely remain legally responsible for the rent the whether the new buyer pays or not.  In some cases, assignment is the only option if the landlord will not release the seller from their lease, if the buyer isn't able to achieve approval from the landlord, or if the new rent proposed will significantly decrease the profitability of the business.  For the buyer, an assignment is often better because the approval process is easier and they have a built in free consultant for the life of the existing lease.  Either way, lease negotiation can make or break a transaction and it is best to know the landlords intentions as soon as you make the decision to sell.

The last buyer hot button relates to documented operating systems, similar to those provided with the purchase of a franchise.  Standard operating procedures provide a buyer with an existing system for success. If you haven't already, you should systematize your business by creating an operating manual for each area of your business.  This could be as simple as a binder with tabs for sales, marketing, operations, human resources, etc., or as detailed as individual binders for each department with job descriptions and pre-printed forms.  By having a system in place for a potential buyer, you will be able to easily transfer your knowledge and demonstrate to the buyer that the business can continue to be successful without your presence. 

What's it Worth?

Now that you understand want a buyer wants, you need to determine what you as the seller wants.  Every seller must ask themselves, "How much cash do I want to receive at the closing?" or "What is my premium price?". 

Keep in mind that the seller must pay taxes on the proceeds of the sale either as regular income or capital gains.  In addition, there will be closing costs, which are traditionally split between the buyer and the seller, and brokerage fees if a business broker or intermediary has been engaged.

A key component to achieve the highest price is for the seller to offer to carry a promissory note, making the seller the banker for a certain portion of the purchase price.  By offering to carry a note, the seller demonstrates to the buyer that he or she believes in the business and that they will remain financially invested in the success of the company after the sale.  Sellers that carry a partial note often achieve a higher final selling price than those who settle for a discounted all cash price.

When pricing the business for sale, the more reasonably the business is priced, the faster business will sell.  Most small businesses statistically sell on a multiple of 2 to 5 times adjusted net cash flow, depending on the industry.  When pricing the business, be sure to enlist a certified business appraiser or an experienced business broker to provide you with an opinion of value.  The opinion of value will be determined by adding owners salary, health benefits, financial perks, depreciation, amortization and non-reoccurring expenses to the net income stated on the profit and loss statement or tax returns.  By adding these items back to the financial statement, a buyer will have a better idea of how much income he or she can expect to receive when they take over the company.  The adjusted net profit is frequently referred to as Sellers Discretionary Earnings. Comparables and asking price of current listings are also utilized to determine an appropriate the market price for your business.

After receiving your valuation, compare the current value of your business to your proposed exit date and premium price expectations. Is your premium price realistic?  Is the time frame realistic to reach the necessary sales levels to achieve that price? In order for you to reach your goals, all elements must come together.

Getting Your Maximum Price

If you determine that you will not be able to achieve your desired price, you must begin to implement strategies for change as soon as possible.  Start with a simple SWOT analysis looking at the strengths, weaknesses, opportunities and threats of your company. Necessary strategies might include creating a marketing plan to increase your sales or a cost containment strategy to reduce your expenses. Other strategies include researching new vendors or purchasing methods to reduce your costs of goods, and or renegotiating your lease to current market prices at a new, longer term.

Copyright 2003 Julie Gordon White 

BlueKey Business Brokerage Mergers & Acquisitions 

jegwhite@bluekeybma.com