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.
Business Sales Tracking Upward Postpandemic
Small business acquisitions increased in 2021 and outpaced pre-pandemic levels in the fourth quarter, according to a report from BizBuySell. Sales were up 24 percent in the first quarter of 2022 compared to the previous year.
More than 8,600 small business transactions closed in 2021. Businesses sold for an average of $325,500—a record high that BizBuySell attributed to buyer competition for a limited number of strong performing businesses. Businesses that thrived during the pandemic were the top acquisition targets, while many owners who struggled during the pandemic said they were waiting for a recovery before making their exit.
That time might be now. More business owners are choosing to sell in 2022, and more than half are citing retirement as their motivation. However, a third of small business owners said their business is currently strong. On the buyer side, 25 percent want to capitalize on emerging opportunities, in particular essential service businesses that are likely to be popular in both strong and weak economic climates.
Sell Your Business (and 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 the following questions:
- How do you choose the products and services you offer to your customers?
- How do you track your current clients?
- How do you onboard new clients?
- How do you conduct marketing campaigns?
- How do you launch a new product or service?
- How do you respond to client questions and complaints?
- What key performance indicators do you use to measure the success of past campaigns and inform new campaigns?
- How do you create invoices and track payments?
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, including
- cash flow and income statement,
- a list of assets and liabilities,
- tax returns for the past two to four years,
- accounts payable and receivable reports,
- supplier and distributor contracts,
- client list,
- copies of client contracts,
- organization chart,
- building or office lease, and
- equipment leases.
This is just a short list of the documentation needed for a future business sale. You should work with professionals such as an attorney and an accountant to prepare a full list of documents needed during the sale process. Because this could take a while, do not wait until the eleventh hour to get your finances in order. 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.
Timing the Sale
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, not so much.
What you can control, however, is choosing to sell your business at a high point. This can be tricky too, though, because you cannot know for certain when you are at the high-water mark. Maybe things have been trending upward for years and the business is more profitable now than at any point. In that case, selling too soon could cost you money. On the other hand, misreading the market and holding on for too long could result in a lower sales price later.
It comes down to risk versus reward and how much risk you are willing to tolerate. You should also acknowledge the element of luck when timing a business sale. Economic trends are a good indicator of whether you should sell or hold, but another disruption could come along at any time, and it could work in your favor or against you.
Do not hesitate to ask for advice from a broker or a business lawyer if you are having trouble gauging the market. And keep in mind that the local economy may be a better indicator than the national economy. If you own a dry-cleaning company and several local cleaners have recently sold for top dollar, that could be a signal it is time to sell.
Legal Considerations for Selling a Business
Once you have an interested buyer in place you are on the verge of selling your business. But before you pop the champagne, there are a few legal hurdles to clear.
Depending on the structure of your prospective sale you may require a letter of intent between the parties, due diligence period for review of key data, sales agreement or asset purchase agreement, and related documentation. The sales agreement or asset purchase 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. According to a recent survey from CNBC, fewer than 30 percent of small business owners who plan to sell their business have a succession plan.
In addition, 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 on arrival.
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 Inhulsen Law has 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.
About Inhulsen Law
Inhulsen Law is a Michigan law firm serving individuals, families, and businesses in the areas of business law and estate planning. To learn more call us at (616) 747-0000, visit our website.