2017 saw a record number of small businesses being sold. According to leading sales website, BizBuySell.com, 9,919 small businesses were reported sold in 2017, a 27% increase over 2016. The increase in sales volume can be attributed to the steady improvement in the economy, sales growth and increasing profitability of small businesses. Since an owner’s cash flow is the primary determinant of value for a business sale, the increasing profit has brought more sellers to the table and has allowed owners to get maximum value for their company.
2018 is expected to be catalyzed by the positive buying momentum from 2017, a strong economy and an increasing population of Baby Boomers looking to retire. Along with the volume of potential sellers comes a large and strong pool of buyers. Interest rates continue to be low and buyers have an appetite for investing in businesses with potential for a return on their investment.
If you do not have a succession plan in place, deciding to sell your business is a major but inevitable decision. There are several factors to consider prior to selling, that will increase your value and increase the probability of a successful closing.
- Clean up financials. The largest factor in determining if your business sale will be successful is having an accurate and well-prepared set of financial statements. Buyers are essentially purchasing cash flow from your business and will spend significant time looking into the financials that are presented. Ensuring that the financials are accurate and stand up to the due diligence of the buyer and underwriters is worth the time of preparation. Any inaccuracies or inconsistencies will be red flags to buyers and reduce their confidence in the business. It is recommended that a business have a minimum of a three-year financial history along with tax and accountant verified documents.
- Increase your sales. A period of declining sales is not the time to sell your business. Too often sellers decide that during the time of worsening business, is the time to exit the business. Since buyers are looking for growth, this leads to a lower valuation of the business owners have invested years of their life in building. Small businesses typically sell at 2 to 6 times the value of the cash flow, so in advance of listing a business for sale, spend time and money in advertising to increase sales. The additional expense of advertising will be worth several times that in return after the sale.
- Find a business broker. A qualified business broker will confidentially generate a larger pool of buyers through a network of buyer contacts as well as listing services offered by the broker. A broker will help to determine the value of the business and assemble a package of financial and marketing materials as well as qualify buyers, coordinate due diligence efforts and help negotiate the sale in the interest of the seller. While the broker will lead these efforts, it is important that the seller markets himself during the selling process. The business owner is the biggest advocate for itself and has the greatest interest in the business so working with the broker in the buyer search and promoting the business sale is key.
- Prepare to stay on. In most cases, especially if your buyer is a private equity buyer, a buyer will request that the owner or key employee stay on with the business for a limited amount of time. While the seller may be looking to retire and move on, the buyer wants to have a smooth transition and will likely request management remain to train, introduce clients to buyer and potentially continue to run the business while the buyer becomes acclimated. This period can be anywhere from 3 months to 3 years depending upon the complexity of the business and the experience of the buyer.
1Source: Small business transactions reported on BizBuySell.com during 2017
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Shawn Todd has been a successful broker in commercial real estate in the South Bend, Mishawaka and Elkhart area since 2006. Specializing in the retail and office leasing market, Shawn has an in-depth knowledge of the local market combined with a strength in negotiating contracts. As Senior Broker, Mr. Todd provides a broad range of real estate transaction services to his clients including location intelligence, buyer and tenant representation, and financial consultative services. Mr. Todd has represented a variety of clients including Aerotek, Inc., Auto Owners Insurance, ABC 57, Maxim Healthcare, Senator Joe Donnelly, Michiana Hematology Oncology, Intercambio Express, Family & Children’s Center and Lighthouse Autism Center.