Selling Your Business: Important Issues for Sellers to Know

If you want to sell your business, or if you are at least thinking about it, you will have a lot of important things to consider. What is my asking price? How do I market to prospects? Do I need professional assistance? Without possibly covering all of the matters a seller must contemplate, this article discusses some of the basic issues any seller of a small business in Florida (or elsewhere) should consider prior to taking it to the market. The following are some key questions that you, as a seller, should ask yourself:

Who is the legal owner of my business? It’s almost a silly question, but let us not overlook it. Your business almost certainly has assets. When we say assets, we are talking about equipment, inventory, trade fixtures, customer-client base, accounts receivables, etc: all of the things which you use to run your enterprise. Most small businesses are sole proprietorships, S Corporations, or LLC’s. If you are operating as a sole proprietorship, then you own the assets in your individual capacity. If you run your enterprise as an S Corporation or LLC, the entity is the owner of the assets and so the entity itself, not you individually, would constitute the “seller” of the business.

How will my business be sold? Selling can be accomplished in one of two ways: The assets can be sold and transferred from the selling party to the acquiring party, i.e., the buyer. In simple terms, this is called an “asset sale”. Alternatively, the buyer can purchase the stock or ownership interest of the existing business from the seller. In the second case, the entity (i.e., corporation or LLC) which owns the assets will continue to exist, but will have a new owner. In simple terms, this is called a “stock sale”. Most small businesses are purchased as an asset sale, not as a stock sale. In other words, the buyer/new owner will purchase the existing assets of the seller’s business and then run it under a different and separate entity.

What should be my asking price? In order to answer this question, you should attempt to first figure out the value of your business. A method commonly used to value small business is the discretionary earnings method. This method requires evaluating the seller’s Profit and Loss Statement, by locating items or expenses which are not necessary to the enterprise, and then recasting the Statement to ascertain the “real” cash flow or earnings of the business. The recasting process involves adjusting or “adding back” the seller’s expenses which are not crucial to the business, or which the buyer, Business Broker Florida as the new owner, would not likely incur himself. Once this recasting process is done, the “value” is then determined by multiplying the seller’s net earnings by a multiplier. This is not an exact science, but the method at least helps the seller get an idea of the price range of his business.

As an illustration, if you determine, after recasting the seller’s Profit and Loss Statement, that the seller’s discretionary cash flow or earnings is $100,000, the next step is to multiply that number by a multiplier. Each industry will likely have its own multiplier, but a commonly used benchmark multiplier is around 2.0. So, if you multiplied 2.0 times the seller’s reconstructed net earnings, you will get $200,000. Thus, the rough value of the hypothetical business would be $200,000. You should note: the discretionary earnings method is by no means the only way to determine the value of a small business. There are other methodologies. If you think you need professional assistance in valuing your business, you should seek the assistance of an accountant or a business broker.

How do I market the sale of my enterprise? You will obviously need to market to prospective buyers. Marketing can be accomplished through a variety of avenues and media. You can start with people who work in your type of business. A competitor, for example, might be interested in buying. You can also try traditional print advertising in your local newspaper. If you are in a recognized industry, there may also be trade or industry journals in which you can advertise the sale of your business. Another option is to obtain professional assistance of a business broker. Typically, the business broker would “list” it for sale on the internet (and through other outlets) just like a real estate broker would list a home for sale. A business broker typically charges a 10% commission for his or her services. If you’re interested in seeking the assistance of a business broker, you should find out about their services, what type of businesses they have sold, what is their commission rate, and how they will go about the marketing process. You should also ask if the broker is a member of the Business Brokers of Florida. While no reputable business broker can honestly guarantee results, he or she can be an invaluable source of assistance.

Leave a Reply

Your email address will not be published.