Taking a small business from inception and startup to an eventual sale is the ultimate course of action for most entrepreneurs, unless they plan on taking the company public. But small business owners need to understand the true value of their company and make sure they are getting the best possible deal in any transaction. This section covers the basics of selling a business, including articles about completing an asset sale, how to determine when to sell your business, the importance of succession planning, business valuation methods, and other related topics.
How and When to Sell a Business
Reasons for selling a business can be highly varied and personal to the seller. There may be personal as well as business considerations that play an important part in both the decision and its timing. However, there are some important considerations that should always be among the concerns for someone contemplating the sale of their business. Ideally a business is sold when the economy is doing well, you have had a positive year financially, and the forecast for the business is positive. When these conditions exist the business can be sold for the best price possible.
Determining the value of a business can be challenging. Setting a price too high can drive away buyers, especially if the valuation is inaccurate. Hiring an appraiser can help you determine the correct price as well as giving you the opportunity to learn about the market for businesses such as yours and the commonly agreed-upon prices within the industry and region. Having a professional appraisal done gives buyers a higher degree of confidence that they are receiving a fair deal and increases the appearance of professionalism.
Leave yourself enough time to find a buyer. This can be challenging, though looking at who is buying similar businesses locally is a good idea. Approaching larger regional or national businesses that deal in the same industry can also help you find an interested buyer. Finally, local business peers may also have leads on potential buyers. Alternatively, you can hire a business broker or a mergers and acquisitions professional to assist you in locating a buyer and completing a sale.
Before selling it may be wise to consider how the seller will finance their purchase of the business. Banks or other institutions may do so, though in these situations you will need a qualified buyer the lender is willing to lend the capital. Another alternative is to provide seller-financing. This is extraordinarily common and if you are unwilling to finance at least a portion of the sale you may be unable to sell the business.
Business Valuation Methods for When You're Ready to Sell
There are three basic methods to business valuation worth considering before you put your company on the market. These three approaches are:
- The Market-Based Approach - This method of valuation looks at other businesses in the same or similar industry that have been sold and bases your price on the average price of similar businesses sold. This type of valuation is not always accurate since it looks to the market rather than to the specifics of your business to generate the price.
- The Asset-Based Approach - This method of valuation calculates the value of the business's assets and bases the price of the business on their fair market value. The drawback of this method of valuation is that it does not quantify other valuable intangible assets such as the business's goodwill or potential for future revenue.
- The Income-Based Approach - This method of valuation looks at the amount of money the business generates for the owner, taking into account both income and debts owed.
