Are you buying or selling a business? Here are some keys to a successful transaction.
A recent survey of business owners found that 4.5 million businesses plan to transition in the next 10 years.
Three factors are driving this trend:
1. Business owners are aging further into or toward retirement. The youngest GenXers have just reached age 40.
2. A concern about the high-interest rates and an anticipated further rise in interest rates in the long term.
3. The discussion of capital gains tax rate increases at the federal and state level.
Reasons to Sell Your Business
There are several reasons to put your business on the market. The most common reason is owner retirement. When there’s no family member or employee to pass the business to, the owner will want a smooth and gradual transition out of the business. Many of these owners turn to the marketplace. Other factors include:
It is in the best interest of the business
Current market conditions indicate a high valuation
Someone makes you an offer you can’t refuse
Current building, office, or store lease expiration is approaching
Health issues have developed or a death has occurred
There is or will be a divorce or partnership dissolution
Why You Should Consider a Business Broker
Buying or selling a business is a complex transaction with a lot of moving parts. Besides price, type of transaction (stock or asset), and financial terms (cash, seller promissory note, earn-out, etc.), negotiated components of business sale transactions also include:
The transition period for the seller: paid, unpaid, employee, consultant, virtual, etc.
Non-disclosure and non-compete agreements
Tax considerations, including allocation
Treatment of key employees in the sale
Real estate: leases, personal guarantees, etc.
An experienced Business Broker also helps you identify likely buyers outside of your family and employee base. These buyers can include strategic partners, financial buyers, entrepreneurs, and lifestyle business buyers. Working with a broker ensures your anonymity, too. When you do it yourself, you may lose customers, employees, and vendors when they find out about the potential sale. All of which will have a detrimental impact on business immediately and in the long term. A loss of a key employee can impact the value of the business. Brokers can create a robust marketplace for your business sale without divulging details that make it easy to identify. These private party sales involve only parties who sign NDAs and have the power to negotiate in good faith and close the deal.
What Goes Into a Business Valuation
Valuing your business appropriately is a sophisticated and nuanced process. It starts with EBITDA (earnings before interest, taxes, depreciation, and amortization), what ownerships earn in all forms, including salary, benefits, profit-sharing, and discretionary expenses. That’s straightforward enough.
However, the second component requires a deep knowledge of the business marketplace. This is something most buyers and sellers simply don’t possess. Brokers, on the other hand, can determine the unique aspects of your product, customers, and location. They can also estimate market demand. That is what buyers are willing to pay for your business. They can also use these same tactics to help buyers find good opportunities and make successful offers.
When You Should Start Planning to Sell Your Business
Businesses aren’t highly liquid so it takes time to sell them – from 3 months to a year. But even if you’re not quite ready to hit the market, meet with brokers to do a trial valuation so you understand what it will take to be market-ready. There’s also a transition time that, depending on negotiated terms, can last from a few months to several years. I recommend that the initial conversations take place at least 5 years before the desired sale date. This will allow time to adjust expenses, increase revenues, and other strategies to increase the value of your business.
If you’re leasing, you may want to time your sale for a year or two before the end of your lease term. This may incentivize the landlord to execute a new long-term lease and remove the owner as a personal guarantor.
Additionally, buyers and sellers should explore the impact of possible changes to interest rates. State and federal tax codes come into play here too. You should consult with your CPA and wealth advisor to understand the implications and decide if the time is right to buy or sell.
Thinking about buying or selling a small business? Call or email me for more information on the considerations you should take and some hints on finding the right broker advisor. We can recommend trusted professionals we work with.
