NVST.com | Private Equity InfoBase | Guide to Selling Your Business

Guide to Selling Your Business

Introduction

There are many ways to sell a business. This resource describes a very generalized process to market your business, locate the most qualified Buyer and obtain the best price and terms to complete a transaction. We recommend that you start by getting familiar with the process and terminology and then hire the Team of Advisors that are needed to accomplish your specific goals. Selling your business is no place to play with the trial and error process of learning a new skill.

Selling your business is a marketing effort. Like selling hot dogs, houses or any other product, many basic marketing principles apply. First the marketing representative needs to know your product, the business. Second the better the business is presented and marketed, the better the results will be. Marketing a business is a challenging endeavor because of the need to keep the proposed sale confidential while actively seeking a suitor.

NVST.com is designed to work with your Broker/Advisor to market your business to qualified investors. If you are reviewing NVST.com as a Guest, this is a great opportunity for you to build your Team of Advisors. Our membership options do not include a "Seller" category since disclosing your name and company here would immediately prevent you from keeping your proposed sale confidential. Instead, each time you come to our site as a Guest you can enter an alias login name and password. No other information will be asked of you. Some of features that are designed for investors will not function without a more complete registration but you will be able to view all aspects of the site and build your team of advisors without disclosing publicly that you are even considering a sale.

Reasons for Selling

Before a business owner can make the decision to sell, he/she should understand the motivation behind the desire to sell. These reasons usually fall into one or more of these categories:

Emotional reasons: This is the most common reason. Owners are bored or burned-out; some have other interests and would rather spend their time, energy and money on these new interests; others simply don't want the stress of running a business anymore.
Changes in lifestyle: At some point all business owners want to change their lifestyle from long hours running a business to a more laid-back lifestyle. This change may be motivated by health concerns or a desire for retirement.
Personal economics: Often business owners want to liquidate or diversify money that is tied up in the business. They may still desire to participate in the business under a management contract with a new owner.
Business economics: A growing company requires the business owner to put a significant amount of the profits back into the company to support increased inventory and receivables. When this is not desirable, it may be an opportune time to consider selling.

Using a Business Broker, Intermediary, Investment Banker or other Advisor

These Broker/Advisors generally represent the Seller of a business, seeking to find and bring a qualified Buyer to the Seller. In exchange, the Broker receives a fee. Marketing and negotiating a business sale is a full-time job. Most business owners employ the services of a Broker/Advisor because they cannot afford to take on this additional task. The services performed by the Broker/Advisor may include:

Business valuation may be provided by the Broker/Advisor or may be obtained by a professional who specializes in business valuation. While education, professional affiliations and credentials are not mandatory in the business valuation field, they should be highly regarded when hiring this professional. Additionally, an asset appraisal may be a valuable and desirable investment if the particular assets are a large percentage of the sales price.

A marketing package should be created that will best display your business to prospective Buyers. The Seller should always review and approve the presentation before it is distributed.

Confidentiality by prospective Buyers is required. All prospects must sign a non-disclosure agreement that assures that the prospect will not talk to employees, suppliers or customers until an appropriate time. It is also very important that they not disclose any information about your business to others, except to seek advice of their counsel who also must not disclose anything.

Prospective Buyer screening and qualification is required to make sure only Buyers with skills and the financial ability to purchase are shown your company.

Facility tours are generally arranged and conducted by the Broker/Advisor who will direct the attention to the aspects of the business that answer questions the prospect may have in order to make a purchase decision.

Negotiations may be led by the Broker/Advisor. Although the Broker/Advisor generally represents just the Seller, he/she has a vested interest in completing the sale and will work toward an accord. The deal always has to be agreeable to the Seller.

Business Valuation

If a business is not valued properly, the business will not sell or the Seller may not receive the price that he/she should have received. There are three basic approaches to assessing the value of a business: (1) value based on earnings; (2) value based on assets; and (3) value based on an industry comparison. An analyst may use one or all approaches depending upon what is appropriate for your company and then conclude with an opinion based upon their findings and experience in the market. You have the final say, but again, if it is overpriced the business will not sell.

Qualifying a Buyer

Most serious prospective Buyers have specific investment criteria in mind that fits with his/her skills, lifestyle and personal goals. The generalist, that looks at every business opportunity on the market, is performing an exercise in self-discovery at your expense. All prospective Buyers should sign a Non-Disclosure and Non-Piracy Agreement that is prepared by your legal counsel before they are provided with proprietary information. Then the Broker/Advisor should provide you with the prospect's personal financial statement and a resume to show they have the means to buy the business and the ability to operate it successfully.

What does a Business Broker cost?

Most Broker/Advisors earn their fees from two sources. A retainer fee, paid in advance or as a monthly installment by the Seller to be used to help pay some of the up-front expenses related to marketing your business. This fee varies, based on the size of the company being sold and the marketing to be performed. The retainer fee may be credited against the commission paid to the Broker/Advisor when the business is sold.

The second payment to the Broker/Advisor is the commission. It is paid only when the business is sold. The commission may be a percentage of the total sale price or a set fee. Often there is a minimum fee regardless of the selling price.

Seller's Documentation

A business Seller must provide the following documentation to the Broker/Advisor so they can successfully represent your business:

Tax Returns: for five years on the Schedule C or the partnership portion of all partners returns or Schedule 1120 or 1120S is required.
Monthly Financial Statements: for the last three years and year-to-date. This will show the seasonal trends of your sales and expenses.
Leases: If any business property is leased or rented, a current copy of the lease is required.
Contracts & Agreements: A current copy of all contracts is required, as they may have to be renegotiated. (It is possible that no renegotiation will be required if the stock of a company is sold.)
List of Assets: (Furniture, Fixtures and Equipment) is provided to help with the valuation and provide to prospective Buyers. The depreciation schedule is a good source of this data.
Inventory Value: at cost is needed. This is a good time to clear out obsolete inventory.
Owner's Job Description: desirable to show the duties of the owner. This will give the Broker/Advisor an additional tool with which to prequalify prospects.

The Offer & Counter-Offer Process

This is a delicate process that may include offers that are below expectations or that contain terms that are simply unacceptable. In all cases it is best to respond with a counter-offer that is acceptable rather than letting emotions get the best of you.

When you are working with a Broker/Advisor, be sure you understand who he/she represents. Communication through this third-party needs to be clearly understood in order to expedite the transaction. Additionally, your attorney and your accountant should review any documents you are prepared to sign.

Intent to Purchase - Items for Review

In the latter stage of a business purchase, the Buyer will perform an investigation called due diligence in order to feel comfortable in completing his/her purchase. A more complete and detailed disclosure of the business information that was disclosed in the marketing of the business will be required so that the Buyer can rely on his own opinion of the validity of the business operation. Use the following list to let your Broker/Advisor know what items are available.