4 Steps to Take Before Selling a Business

Selling a Business Image

The past couple of years have shown that unexpected events can wreak havoc on even the best-laid business plan. In a volatile economic climate, it’s wise to be prepared for every eventuality — including the possibility of selling your business fast. Even if the sale isn’t urgent, it’s important to prepare your business for potential sale. That way, you’ll have all the options at your disposal as you determine your business’s future. Here are four helpful steps to take as you consider selling a business.

1. Determine your sales team

Your business is probably your most valuable asset, so it’s important to begin the process of selling a business with your eyes wide open. In most cases, the first step is to put together a team of experts who’ll help you through the selling process.

A business broker will serve as the quarterback of your sales team. A broker can guide you in finding and qualifying prospective buyers, marketing your company to these prospects, setting a price for the business, and closing the sale. An attorney, an accountant and a valuation professional, each experienced in business sales and purchases, should round out your team.

Don’t rush: You’ll want to exercise caution in building your team. These individuals will play a critical role in the success of your business sale.

2. Research potential buyers when selling a business

Understanding the different types of business buyers is essential to formulating your sale strategy. Here are some of the main types:

  • A complementary buyer is a company that sells products and services that complement or enhance those you sell.
  • A strategic buyer is usually a competitor that’s looking for companies where it can add value to their products and services.
  • A financial buyer is generally one that’s most interested in the potential return on investment.
  • Family and heirs often present unique challenges, such as decisions involving who will (or won’t) be able to buy ownership interests and who’ll occupy positions of leadership.

Lastly, don’t forget about your employees and managers. An internal sale could provide unique planning opportunities through the use of an Employee Stock Ownership Plan. And that will help ensure continuity for customers and staff.

3. Define the value drivers important to buyers

Your specific goals for the sale of your business will hinge primarily on why you’re selling. For example, if you mainly want to keep the business in your family and ensure a smooth transfer of ownership to your heirs, you need to identify the next generation of leaders and start grooming them years in advance of the sale. But if your goal is to sell the business to outsiders at the highest possible price, you should be taking steps long before the sale to boost the company’s value to potential buyers.

In considering companies to purchase, most buyers will look at quantifiable measurements that will help them gauge their potential return on investment. Thus, the best way to increase your company’s value to potential buyers — and boost its sale price — is to focus on the value drivers that will be important to them.

4. Ensure your business is appealing

Virtually all buyers will want to know about your business’s financial health. They’ll want to see a history of consistent cash flow, sales and earnings. You’ll need to determine which key performance indicators are most important to your company’s financial health and focus on improving them before you list your business for sale.

Human resources are usually the next area potential buyers examine. They’ll want to see a strong executive team that can keep things running smoothly after you’ve left. And they’ll want a skilled and stable workforce in place with relatively low employee turnover.

Your customer base also will enter the picture. Most buyers seek companies with a diversified base and low degree of customer concentrations. If your sales and earnings are heavily dependent on a handful of large customers, this could be a big red flag for buyers.

Last, but not least, business buyers usually want to acquire companies they can grow. Thus, you generally need to be able to show them a plan that demonstrates how they can grow the business after they buy it.

A stronger business

Even if you decide to hold on to your business for the foreseeable future, taking steps to prepare for selling your business will give you a better sense of where the business stands. It also will help you evaluate which areas might need to be strengthened to improve its profitability going forward. Contact one of our tax professionals with any questions you might have about selling your business or download our succession planning guide to get started.

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