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A guide to selling a small business

A guide to selling a small business

Are you planning to sell your small business? Do you have any previous experience?

It's not a simple process. Several factors affect the amount of money you will make when selling the business. You might need to enlist the services of an accountant, a broker as well as an attorney. Some of the factors that might affect the profit you will earn include a reason for the sale, the business environment at the time of sale as well as structure and strength of the business operation.

Selling your business is going to take a lot of time and you will also need to figure out smart ways of handling the money once the business gets sold.

Advertise your business far and wide in order to attract more buyers. Nowadays, one of the best ways to market a business for sale is to advertise on popular business for sale directories such as Businesseek to connect with potential business buyers.

1. Why are you selling the business?

It is one of the first questions you will get from potential buyers. There are several reasons for selling a business including disputes with partners, retirement planning, boredom, relief from work, death or illness, property finance and various others. Some business owners decide to sell their business when it isn't turning a profit but attracting qualified buyers for such businesses can be harder.

Some of the factors that have the potential to make your business attractive for potential buyers include consistent profitability, a strong and loyal customer base, consistently increasing profit and a significantly profitable contract over several years.

2. When to sell?

Ideally, you should start preparing to sell the business, as early as you can. Most successful sales are a year or two in the making. A lot of time is needed for improving the business structure, financial records as well as customer base to enhance the profitability of the business. Improvements in these attributes will also help with the transition to the buyer and ensure that the business runs smoothly.

3. How to value the business?

It is important to determine the right value of your business otherwise you might sell it for too low a price or ask for a much higher price that will deter potential buyers. It is better to use the services of a business appraiser for proper evaluation. The appraiser will go through the business operations in order to determine the exact value with a detailed explanation of various factors. It will provide the necessary credibility for the asking price and give you a good idea of the right listing price.

4. Using a brokerage service

You will save money when you do all the work and you won't have to pay the commission to a broker. It is typically the best way to sell the business to a current employer or a trusted family member. However, if you are selling the business to someone else, it is better to use the services of a broker.

It will save a lot of time which means you will be free to focus on your business. Also, it will help in making the sale quietly and also allow you to fetch the highest price as brokers get a percentage of the sale price. Make sure you clearly discuss your expectations with the broker and always remain in touch.

5. Preparation of documents

Your documents need to be in order for the sale to go through smoothly. Typically, important documents for a sale include tax returns and financial statements for the past 3 to 4 years. Go through these statements with an accountant.

Also, draw up a list of equipment that will be part of the sale. Prepare a list of contacts that are important for supplies as well as sales. Don't forget to get important documents such as the current lease. Prepare multiple copies of these documents as you will need to distribute a complete set to potential buyers.

Prepare an information pack. This information pack should provide a concise summary of the business operations and may also act as an operating manual for the business. Your goal is to make your business presentable. If there is broken equipment or any area of concern in the business, it is recommended to replace or fix the equipment before the sale is finalized.

6. Finding the buyer

As per SCORE which is a nonprofit association for entrepreneurs and also a partner of the US Small Business Administration, it may take anywhere from six months to two years for a business sale. It can be challenging to find the right buyer. Advertise your business far and wide in order to attract more buyers.

Once you have found a few qualified potential buyers, here is what you should do to keep things going:

Make sure you shortlist at least 2 to 3 potential buyers. It will help in case the initial buyer decides not to go ahead with the purchase.

Maintain contact with potential buyers.

Make sure the shortlisted buyers prequalify for financing before providing important information about the business.

If you're planning to finance the sale of the business, it is important to go over the details with a lawyer or an accountant to ensure that the buyer agrees with the same.

Always leave some room for negotiation but make sure you stand firm on a reasonable price taking into account the future worth of your business.

All the agreements always need to be in writing. Also, make potential buyers sign a confidentiality/nondisclosure agreement for protecting crucial business information.

It is recommended to get the signed purchase agreement into escrow.

Here is a list of the documents you might get once the sale is complete:

Bill of sale outlining the transfer of business assets to the new buyer.

Document assigning the lease.

Security agreement outlining the retention of a lien on the business by the seller.

The buyer may also ask you to sign a non-compete agreement which typically prevents you from starting a competing business.

As far as the brokerage fee is concerned, it is common for brokers to charge 10% for businesses that sell under $1 million. It might seem steep but an experienced broker might be able to get a better deal for you as compared to the one you arrange all by yourself.

7. Taking care of the profits

Do not immediately start spending the money you make from the sale. Take some time to outline your financial goals. Also, do not forget about taxes. Get in touch with qualified finance professionals to figure out the best way to invest the windfall. Keep your focus on long-term goals such as saving enough money for retirement and remaining free of debt.

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