When you’re selling your business, you want to negotiate the best terms of sale possible. Usually, that means the best selling price you can get. It’s important to know the right questions to ask and things to consider when you prepare to sell your business. Here are eight things that you should know when you sell your business:
1. The value of your business
In order to sell your business for a fair price, you must know the value of your business. There’s no single rule for determining the value of a business. The value of your business depends on your income, debts, profits, physical assets and even reputation. You might use several different methods to determine the value of your business like profit multiplier, comparables and asset valuation.
Ultimately, it’s important to be able to justify what you ultimately decide is the value of your business. Expert appraisers can help you value your business objectively and accurately. You should document what you rely on for your valuation in order to share the information and discuss it with potential buyers.
2. How you’re going to divide the work during sale negotiations
It’s important to avoid putting 100 percent of your efforts into the business sale. You still have a business to run. If high-level employees put their effort into the business sale instead of running the business, sales might drop. Prospective buyers who notice the drop in sales might immediately demand a lower sales price.
Of course, negotiating the terms of the sale is going to take some time. It’s important to designate who should focus on the sale and who should focus on continued business operations. The sale of a business can take months. Remember, your business sale is a marathon and not a sprint. It’s important not to allow the sale negotiations and preparations to overshadow the continued efforts of running your business.
3. Terms of negotiation
Determining the terms just for negotiating a business sale is an effort all of its own. Before you can negotiate the terms of the sale, you must agree on the terms of negotiating the sale. You should prepare a letter of intent that defines things like confidentiality, exclusivity, due diligence, the exchange of information and a potential penalty if the deal doesn’t materialize. While a letter of intent is preliminary, it’s critically important to your business whether or not you ultimately end up making the sale. A letter of intent can protect your interests as you explore whether to make the sale.
4. Current financial information
The buyer is going to want to see your financial information. The financial information is also part of placing an accurate value on the business. As you begin preparations to sell your business, it’s important to get your financial records in order. You want to gather income statements, balance sheets and tax returns for several years.
Getting your records together as early as possible can help you deal with any questions or discrepancies that you find in your books. If there are errors, you must reconcile them. A potential buyer is going to look through your financial statements. If they notice errors, they might demand a lower selling price or refuse to continue sale negotiations. Beginning to compile your financial statements early gives you the upper hand and time to consider how you’re going to respond to unfavorable information.
5. The weaknesses of your business
Every business has their inefficiencies and vulnerabilities. It’s important to identify them so that you can respond to them as questions come up. A potential buyer is going to look at the weaknesses of your business and use them as a way to try and lower the sales price. Brainstorming what issues the buyer is going to raise allows you to think through how you can minimize negatives and defend your proposed selling price.
6. Your financial plan after the sale
If you own a business, you likely rely on the business for your income. As you negotiate a sale, you should take the time to plan through your future finances. You may continue to work for the business as an employee. You may continue to draw a salary as a consultant for several years after the sale. You might rely on the sale price for future income. It’s important to have a plan for your financial future so that you’re personally ready to sell your business.
7. How much debt you have
As you prepare to sell your business, it’s typically a good idea to minimize your debts. A high amount of debt can scare a potential buyer and lower the selling price. Identifying your debts and doing what you can to minimize them can help you raise your selling price.
8. Whether you plan to offer seller financing
Business sales often rely on financing. If you’re selling your business, you might consider financing the sale for a buyer. Of course, that’s not a decision to make lightly. You must be in a financial position to finance the sale. You must also make sure that the buyer is financially sound and likely to fulfill the terms of the sale. Because sales with financing typically sell at a higher amount than sales without financing, whether to offer to finance the sale is a serious question. While you can ultimately raise your selling price, it’s only a good idea if it makes financial sense under all the circumstances.
What you should know when you negotiate your business sale
When you decide to sell your business, there are a lot of things to know. You need to know what your business is worth. That’s typically a question that requires some investigation. You must also know how you’re going to continue to operate your business while you negotiate the sale.
Agreeing on terms for the negotiation is also a critical part of ensuring that you’re protecting your business during sale negotiations. When you negotiate the sale of your business, it can be hard to be impartial. An experienced business law attorney can help you identify potential issues and help you negotiate your business sale in the best way possible.
To schedule a consultation to find out more about the process of selling your business, call us today at 919-787-7711 or fill out our contact form.