Just as you needed a plan to get into business, you’ll need aplan to get out of it. Selling or otherwise disposing of a businessrequires some forethought, strategizing and careful implementation.In some ways, it’s a little more complicated than starting abusiness. For instance, while there’s really only one way to starta company, there are at least three primary methods forentrepreneurs to leave the businesses they founded: selling,merging and closing.
Deciding to sell the business you have worked so hard to grow israrely an easy decision. However, it may be the right one undersome common circumstances. Selling may be preferable to owningif:
- You or another owner get divorced and need cashfor a settlement.
- Partners who own the business decide to dissolvetheir partnership.
- One of the owners dies or becomes disabled.
- You are ready to retire and have no heir tocontinue the company.
- You want to do something more challenging, morefun or less stressful.
- You don’t have enough working capital to keepgoing.
- The company needs new skills, a new approach orresources you can’t provide.
If you’re aware of the factors that indicate selling is a goodidea, you can time the sale to take advantage of high prices.Usually, you’ll get the most for your company when sales areclimbing and profits are strong. If you have an unblemished historyof solid performance, by all means, sell the company before troublestrikes. Other factors that may affect the timing of a sale areavailability of bank financing, interest rate trends, changes intax law, and the general economic climate.
You can sell your business yourself, but many owners contractwith a professional business broker to handle the job. In additionto the training and awareness of relevant legal, tax and accountingconsiderations, a good reason to use a broker is to protect youranonymity and confidentiality. If you’re advertising your businessfor sale and showing it to prospects, it compromises your abilityto continue leading the firm. A broker can front for you, screeningprospects and keeping the identity of the business owner secretfrom all but qualified buyers.
Most business buyers are individuals like you who want to becomesmall-business owners. But sometimes you can transfer ownership ofa business to another business in a merger or acquisition. As arule, businesses have deeper pockets and borrowing power thanindividuals, and they may be willing to pay more than individuals.Businesses also tend to be more savvy buyers than individuals,increasing the chances your business will survive, albeit perhapsas a division or subsidiary of another company. However, businessescan not move as fast as individuals. It may take you a year or moreto get your company ready to be merged or acquired. You will needto:
- Clean up the balance sheet.
- Drop poorly performing products.
- Terminate insider deals, such as property the company isrenting from you or family members.
- Trim excessive fringe benefits.
- Make sure you’re paid up on all taxes.
- Have at least two years’ worth of audited financialstatements.
The best candidate for a merger is a company that sees yours asa strategic fit with their own firm. If you have something theywant and can’t find elsewhere, such as a unique product ordistribution channel, they may be willing to pay a premium price. Acompetitor who only wants to put you out of business is usually apoor merger prospect, however. This buyer is motivated only byprice and probably isn’t interested in preserving the business.
Sometimes, the best thing to do is simply sell your inventoryand fixtures, pay your creditors and employees, close your doors,and walk away. Closing may be the best option if your business isfailing, isn’t valuable enough for anyone to want to acquire it, oris the type of business that is unlikely to be valuable without youpersonally operating it. (A law office is a good example of this.)If you can’t raise enough money by disposing of your assets to payeveryone off, you can give them what you have and promise to paythem the rest later on. You can usually avoid legal wrangles if thedebts are small enough.
Variations on this theme include making formal or informalarrangements to pay off your creditors, filing for voluntaryliquidation, and declaring bankruptcy. Only bankruptcy is intendedto give you a second chance. The others are almost certain toresult in the end of your business.
Value, like beauty, is in the eye of the beholder. There areprobably as many ways to define value as there are businesses. Thebasic definition is how much money the business could be expectedto sell for on the open market. But that’s dependent on what ahypothetical buyer is looking for, how the business has positioneditself, and exactly who is doing the valuing. In this sense, valuedoes not necessarily equal net profits or even break-evenperformance. Cash flow is usually more important than profits arewhen valuing small businesses.
An entrepreneur may chalk up a trip to Hawaii for a meeting as abusiness cost or keep a spouse or child on the company payroll whena publicly held company would not. To accurately assess the valueof a business, the ability to employ family members and mixbusiness with pleasure must be accounted for.
Value may also come in other forms. Ownership of a patent,proprietary process or trade secret may, by promising exceptionalfuture cash flow, increase the value of a business. Companies thatdominate a market, no matter how small, are often sought out forpurchase at premium prices by other firms that, for one reason oranother, want to add that niche to their existing businesses. Thereare different kinds of value for different kinds of people.
Many businesses count their physical location as a primarycomponent of value. That’s especially true in the case ofrestaurants and other retail businesses and, again, is notnecessarily connected to cash flow or profit. Some retailers make apractice of buying businesses only for their locations rather thanhow much or what they sell, or who they sell it to, figuring that ahigh-traffic spot will eventually prove a winner for some businesscombination. The business itself may not be doing well, but if thebusiness got good terms and conditions on its lease, and it’s in anexcellent location, sometimes they can switch what they sellthere.
Location may also play a starring role in value if a company islocated in a resort community that has a lifestyle that’sattractive to would-be business owners. Other businesses, such asbed-and-breakfasts and bookstores, may have higher values becausethey appear glamorous or simply interesting to potentialbuyers.
The intangible known as goodwill is another key consideration ina business’s value. Goodwill may range from a long-establisheddistribution network to a sterling market reputation. And sometimesa buyer will pay top dollar to obtain a business with greatgoodwill.
Experts agree that if you want to boost your business’s value,pay close attention to the bottom line of your cash flow statement.That’s because most of the time, the value of your business issimply a multiple of the cash flow it generates.
