When Should I Think about Selling my Business?
Part of the reward of being a small business owner is seeing your hard work pay off over the years. The many sacrifices you made for your business will certainly pay off. Some business owners would prefer to continue to operate their business until they pass, but others looking forward to closing the sale of their business! If you are dreaming of that day, it will take some work to get you across the finish line.
Very few owners experience the luxury of someone approaching them out of the blue and handing them a check to buy their business. Selling a business requires many of the same steps that it takes to build a business. You need to plan, execute a strategy, and in some cases, benefit from good timing. Whether you are trying to cut your losses, maximize your profits, or move on to the next phase of your life, selling your business may be an entrepreneurial challenge all its own.
Sell Your Business (Not Yourself)
The owners who build a business from scratch are often the heart and soul of the enterprise. They wear many hats and yet also manage to be more than the sum of these parts.
While this may have been a winning strategy while you were running the business, when the time comes to sell it, you should no longer be the primary selling point. After all, a potential buyer is buying your business—not you. They want a strong-performing business—not a strong-performing owner.
If your business has managed to stay up and running for years, it is probably in no small part because you were doing many things right. But you need to be able to describe what those things are to another person. In other words, the success needs to be replicable. And that means having structures, or standard operating procedures (SOPs), that answer “how” questions. How do you choose the products and services you offer to your customers? How do you track your current clients? etc.
While you probably have SOPs for these and other routine business tasks, they may not be in writing. Ask yourself, if you had to delegate these tasks to another person right now, could you? If the answer is “no,” then your SOPs may be lacking the step-by-step clarity that will be attractive to a buyer.
Prepare Your Financial Records
Your company’s finances will come under scrutiny during the formal due diligence process. But even before the due diligence investigation occurs, any serious buyer will want to look at your financial documents.
If you cannot back up your claims about your business with facts, figures, and statements, the buyer could walk away, or use it as leverage to lower the sales price. You should work with professionals such as an attorney and an accountant to prepare a full list of documents needed during the sale process. If you are looking for a great accountant, let us know! We are happy to provide a referral.
Timing the Sale
One story we hear often is, “I was ready to sell, but the market just isn’t.” Don’t worry though, you may be able to sell your business in tough economic times if what you are selling is in demand. There will always be economic uncertainties. Nobody saw a global pandemic coming, for example, and disasters do not affect everyone equally. E-commerce and home fitness companies boomed during COVID-19; travel companies and retailers (which had previously done very well), not so much.
What you can control, however, is choosing to sell your business at a high point. If you’re not sure, you should consult a broker to help you gauge the market.
Legal Consideration for Selling a Business
Once you have a seller in place and have negotiated a sales price, congratulations—you are on the verge of selling your business. But before you pop the champagne, there are a few legal hurdles to clear. Fortunately, we have experience helping clients navigate the confusion of a closing.
The sales agreement is the contract that governs the sale of the business. Adjustments, broker fees, and any other details relevant to the sale (such as how you will run the business until the sale is final) must be included and agreed upon. Once the agreement is signed, both parties are bound by its terms. However, not all business transfers are conducted in this manner. Instead of selling a business, perhaps you are handing it over to family members. If that is the case, there are issues such as estate and gift tax obligations and succession planning to keep in mind. State laws and governing documents such as an LLC operating agreement may have provisions about selling or transferring a business. You need to make sure that the transaction is legal and abides by the process that you established at the time of formation. Otherwise, the deal could be dead in the water.
Selling a business is the last stage of a long and hopefully rewarding journey. The earlier you start preparing your business for sale, the better positioned you will be to close the deal when the right opportunity presents itself. This may be your first time selling a business, but here at McClenaghan Law Group, we have advised many small business owners on sales and related issues. We can provide a valuable third-party perspective while advocating for your interests: call or contact our office today to set up a meeting. You can reach us at 614-429-1053 or by emailing courtney@lawdublin.com.