Selling a business is different than selling any other asset one owns, because a business is more than an income-earning asset. It is a lifestyle as well. Therefore, the decision to part with it can be emotional. Personal ambitions should be weighed against economic consequences to achieve a properly balanced decision to sell or not to sell.
It is said that timing is everything, and certainly that old axiom is true as applied to the decision to sell a business. Intelligent business owners carefully plan out the decision to sell. They recognize that a business should be sold only after proper preparation and not because of sudden personal frustration or a short-term downturn in business. Business owners choose to sell for a variety of reasons:
It is imperative that a potential business buyer carefully think through his motive for considering the purchase of a business and his criteria in selecting one. A buyer should consider their experience—both vocational and a-vocational—what they are good at and what they enjoy.
If a buyer is interested in a business that has a product or service that is outside his or her area of expertise, then they should make certain that key employees will stay on after the change in ownership or that similar expertise can be hired.
It is equally important that a buyer identify the desired location(s) and the amount of money willing to be invested. If the money to be used is not liquid form, the buyer should assess what the realistic possibilities are of obtaining the funds from outside sources. One should also decide on the size of the business in terms of sales, profits, and the number of employees.
It is important to determine if the desired business is to be one that is profitable and stable or one that is losing money and in need of new management. The more profitable and stable a business, the more it is likely to cost.
Nearly every privately held business is operated in a manner that minimizes the seller’s tax liability. Unfortunately, the same operating techniques and accounting practices that minimize tax liability also minimize the value of a business. As a result, there is often a conflict between running a business the way an owner wants and preparing the business for sale. Although it is possible to reconstruct financial statements to reflect the actual operating performance of the business, this process may also put the owner in a position of having to pay back income taxes and penalties.
Therefore, plans to sell a business should be made years in advance of the actual sale. This will permit the time required to make necessary changes in accounting practices that demonstrate a 3 to 5 year track record of maximum profits.
A valuation report should be prepared. The valuation report eliminates guesswork and the painful trial and error method or pricing that so many owners rely on. All too often, they arbitrarily decide on an expensive price for the business and then go to the expense and effort of developing prospective buyers, only to be unable to strike a deal. It is only after gradually lowering the price and repeating this folly several times that they learn what their business is really worth. Having a professionally prepared appraisal eliminates this problem.
The first step buyer or seller must take in evaluating a business for sale is that the reviewing its history and the way it operates. It is important to learn how the business was started, how its mission may have changed since its inception and what past events have occurred to shape its current form. Evaluating the business can include all or part of these: