Understanding and Choosing Your Marketing Options When Selling Your Business

The most frequently asked question from those selling small businesses has to do with where and how to find buyers.

Small businesses are used to bootstrapping and implementing guerrilla tactics, and therefore they’re used to getting the word out via networking, flyers, even signs in windows – none of which works well in the business sale process. As the preceding section in this chapter explained, this is a time for discretion and confidentiality.

You need to offer your business for sale in a manner that doesn’t tip off customers, creditors or employees. And most certainly you don’t want to let competitors know your sale plans – unless you’re considering a specific competitor as a likely buyer.

If you know a specific person or business that’s likely to buy your business, you can proceed with a confidential inquiry. To cast more widely for buyers, the only safe approach is to offer your business for sale discreetly and without identification, using brokers or blind ads to get the word out.

Provide a Concise Yet Thorough Description of Your Business Offering.

Help buyers self-qualify themselves by providing clearly defined purchase requirements.

State the annual revenues of your business as a way to help buyers determine whether your business is too large or too small to match their interests. Likewise, state your asking price to allow buyers to match their financial capabilities with your offering before responding to your ad.

Though it seems counter-intuitive to write ads that narrow the response pool, when it comes to sharing information about your business, the goal is to deal only with those most interested and capable of making the purchase.

10 Questions a Business Broker Hopes You Never Ask

Q1. Why exactly did you call me? 

Q2. Are you the best business broker in town? 

Q3. Can you sell my business?

Q4. Do you have a buyer for my business? 

Q5. What do you know about my business? 

Q6. How many buyers are you working with currently? 

Q7. How many of your buyers have at least $100,000 for an investment? 

Q8. How much money will you make when you sell my business? 

Q9. How much is my business worth in today's market?

Q10. How long have you been a business broker?

 

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Prepare to Maintain Confidentiality.

To maintain privacy throughout the selling process, take these steps:

Have a confidentiality agreement ready for presentation to serious, qualified buyers.  Be sure to include a clause that ensures mutual confidentiality and an expiration date that allows the confidentiality assurance to expire, usually after two years.

Establish a private email account for use exclusively with prospective buyers. Otherwise, you risk tipping off employees and causing concern within your business. Instead, invite buyers to send a confidential email to a non-business address, which you set up exclusively for the purpose of business sale communications. Don’t use your personal name, as it’s too easily traceable, but rather create an address that disguises who you are. For example, plumbingoffer7@gmail.com or even a line-up of random letters and numbers.

Direct calls to a non-business phone number, and be sure to answer the phone or offer a voicemail message that conveys appropriate greetings to business buyers. Keep in mind that your home phone may not be appropriate here, as employees, vendors or competitors who know you personally might recognize your phone number or your identity on your answering machine.

Even with a signed confidentiality agreement, until you have a letter of intent or a buyer’s offer in hand, don’t share proprietary processes, trade secrets, client lists, or financial details about your business.

Your sale offering likely listed annual revenues and owner’s cash flow, along with asking price. Don’t share further financial details until the prospective buyer has demonstrated clear ability to purchase and pledged to maintain confidentiality. Be prepared for questions from employees and associates, who may suspect your sale intentions.

You can be truthful without spilling the beans. You can say you’re developing an exit plan to ensure future stability for your business; you can say you’re talking to potential partners or successors without out-and-out announcing they’ll be replacing you near-term. If people ask, “Are you thinking about selling,” you can follow the suggestion of Appraiser Glen Cooper and answer, “Sure, I’ll always talk to someone who wants to buy me out! Did you bring your check book?”

How to Write Ads that Attract and Pre-Qualify Business Buyers

Writing business-for-sale ads is an exercise in fine balance.

• You have to entice prospective buyers about the current and potential strength of your business without even slightly stretching facts, which you’ll have to warrant as accurate at the time of an actual purchase.

• You have to tell enough about your business to make buyers think they’d like to know more but you can’t tell so much that readers – particularly competitors – can piece together the facts into a description of your business.

• You have to keep ads short yet build enough interest and trust to prompt prospective buyers not just to respond but to respond with information about their financial and business capability to make a purchase.

• You have to indicate enough about your business size and price to attract interest from those qualified to make the purchase while allowing those who don’t match up with your asking price to rule themselves out.

• And maybe most importantly, you have to make your business stand out from the crowd of other businesses listed in the same place, whether it is on an online business-for-sale marketplace, a classified ad, or an ad in a trade publication.

Checklist for Closing the Sale of Your Business

Once you and your business buyer negotiate the fine points of a deal, it’s time to schedule the sale closing. A few easy steps will help you lay out what you need to do in advance, during, and immediately following the big day.

Step 1. Prepare for Closing Day

Here’s a chart outlining pre-closing day tasks. Work with your broker, if you’re using one, and your attorney and accountant to confirm and take the steps necessary in your particular closing. Once each step is taken, review the closing-day materials with the buyer to ensure advance agreement for a smooth closing.

PRE-CLOSING DAY CHECKLIST
	Schedule your closing when all parties are available and preferably during a morning hour so you can reach banks and government offices following the closing. Also, aim for the last day of the quarter, month or pay period to simplify proration of monthly expenses that transfer with the sale.
	Finalize the purchase price to reflect the outcome of price negotiations; prorated rent, utility and other fees; final inventory value; final accounts receivable and accounts payable value.
	Prepare corporate documents. If your business is structured as a corporation, work with your attorney to pass a corporate resolution authorizing the sale.
	Prepare government and tax forms such as: Forms required by your Secretary of State or Corporations Commission; transfer documents for vehicles included in the sale; transfer documents for intellectual property; and IRS Form 8594, which you and the buyer need to complete showing an identical allocation of the purchase price.
	Confirm insurance requirements detailed in the purchase and sale agreement.
	Prepare furniture and equipment sale list, accompanied by a list of which, if any, are under lease. Also prepare a list of assets excluded from the sale based on buyer-seller negotiations.
	Prepare to transfer contracts and agreements. Obtain approvals, assemble titles and leases, and take steps necessary to transfer all assets and obligations included in the sale.
	List and prepare to transfer work in process.
	Finalize list of accounts receivable and accounts payable, including aging reports.
	Prepare loan documents including a promissory note; security agreements including buyer’s personal guarantee and personal guarantees from buyer’s spouse and third-party guarantor, if any; and a UCC financing statement to be filed with your state.
	Prepare to transfer building lease. Assemble copies of lease and lease amendments; prepare lease assignment and assignment-acceptance documents.
	Prepare personal agreements including consulting or management agreement and covenant not to compete, if any.
	Prepare exceptions to warranties and representations, if any.
	Prepare succession agreements for employee benefit plans including profit sharing, flexible spending or other plans.
	Prepare the bill of sale.
	Prepare the closing or settlement sheet, which lists the purchase price and all costs and price adjustments to be paid by or credited to the seller and buyer. Your attorney will prepare this sheet unless your sale is closing through an escrow agent, in which case it will be prepared by the escrow office.
	Prepare the purchase and sale agreement.
	Other, based on input from your sale advisors

Step 2. Schedule the Closing

If your sale will close in an escrow office:

• The closing will follow the instructions provided when the escrow account was established.
• The escrow officer will confirm that all obligations and contingencies listed in the letter of intent to purchase and in the escrow instructions have been addressed.
• You and the buyer will sign closing documents.
• The escrow agent will transfer funds and record the sale.

If your sale will close in an attorney’s office:

• Your attorney, your buyer’s attorney, or both, will prepare and review the purchase and sale agreement.
• Upon legal advice, you’ll address any outstanding obligations or contingencies.
• You, your buyer, and the attorney who drew up the documents will meet to sign documents and transfer funds.

Step 3. Prepare and Review the Purchase and Sale Agreement

Your broker, if you’re using one, will likely provide a purchase and sale agreement form, or you can obtain one from a legal forms resource. Better yet, have your agreement drawn up by an attorney and – under any circumstances – have your attorney review the agreement before you sign it, since it contains descriptions of obligations that are regulated by rules that vary from state to state. 

Step 4. Finalize the Deal

On closing day, here’s what to expect:  

Here’s who will attend: You and any other owners of your business; your spouse and any spouses of other owners of your business (necessary if you live in a community property state); your buyer or buyers and their spouses (necessary if they live in a community property state); third-party loan guarantors (if any) unless they previously signed personal guarantees or provided powers of attorney to those in attendance; your attorney and possibly your buyer’s attorney; your escrow agent, if any; your broker, if you have one; and any others whose signatures will be required.  

During closing, you’ll likely take the following steps:

• Agree to post-closing final adjustments to purchase price to account for prorated expenses and closing valuation of inventory and accounts receivable, usually finalized within 15 days of closing.
• Review and sign the purchase and sale agreement.
• Review and sign loan documents.
• Review and sign lease-transfer documents, vehicle ownership-transfer documents, franchise documents, succession documents and other documents involved in transferring your business or its assets.
• Review and sign seller’s consulting, employment, and/or non-competition agreements.
• Review and sign the bill of sale.
• Review and sign articles of amendment to change the name of your business, thereby freeing the name for use by the buyer. This step allows the buyer to amend the working name he or she has been using during the purchase process to the name being purchased as part of the sale.
• Review and sign forms to transfer patents, trademarks, copyrights and other intellectual property assets.
• Review and agree to the closing or settlement sheet listing all financial aspects of the sale including how expenses and credits are assigned to each party.
• Review and agree to the Asset Acquisition Statement, IRS Form 8594, which you and the buyer must attach, showing the identical allocation, to your federal income tax return.
• Receive the buyer’s payment for the purchase price in full or for a sizable down payment, depending on the payment terms you negotiated.

And, with that, your deal is done! But your involvement isn’t over. You still have to announce the sale and take care of long lists of details and legal actions necessary to formally transfer your business and ease its transition to its new owner.

The Process of Selling Your Business

Over the next decade, six out of ten U.S. business owners plan to sell their companies - a noticeable increase over previous years. Many are baby-boomers, with an eye on selling their businesses to fund their retirement and as a result sale preparation and exit strategy are high priorities.

Start taking steps today to prepare your business for sale so you can maximize your long-term value and create a more profitable company.

Deciding to Sell Your Business

Small business owners have many different reasons for selling their companies. For some, a business sale is the logical conclusion of a long and successful entrepreneurial career. But for the others, the sale may be motivated by a personal or family crisis, a new business opportunity or an unexpected change in business conditions.

Preparing Your Business for Sale

Prospective business buyers won't simply take you on your word. You need to have documents ready to support every claim you make during the sales process. During the course of a business sale prospective buyers will expect to see "just the facts" about your business. Therefore, you will need to have all your documents completed and organized before the business ever hits the market.

Determining Your Price

When selling a business, it's critical to get the asking price right. Set it too high and you won't get any buyer interest. Set it too low and you'll leave money on the table. So when you set a price for your company make sure that every penny of company value has been accounted for while also remaining realistic.

Marketing to & Qualifying Buyers

It is a great feeling to receive interest from potential buyers when selling a business. Let's face it — selling a business independently can be a lot of hard work and a major time commitment, and when people show interest in what you are selling it can translate into a quick, painless sale.

Negotiating and Due Diligence

Any owner can put a business on the market, but selling successfully is another story. With thousands of dollars hanging in the balance, today's do-it-yourself sellers need to learn the fine art of negotiation before it's too late.

Closing the Sale

Once you and your business buyer negotiate the fine points of a deal, it's time to schedule the sale closing. A few easy steps will help you lay out what you need to do in advance, during, and immediately following the big day. Get our comprehensive pre-closing checklist of important tasks.

Planning for Ownership Changes With a Buy-Sell Agreement

The first months of a new business are heady times. As an owner of a partnership, you have many things to juggle -- organizational papers, contracts, and tax forms, to mention a few -- never mind the actual work to be done. The last thing you have time for is worrying about what will happen when you or another owner wants to move on, retires, divorces, or dies. Unfortunately, it's a huge mistake to ignore the fact that sooner or later your business will change owners. If you doubt this even for a minute, think about what will happen if your business partner:

• Quits to move to another city with a spouse
• Leaves to join or start a competing business
• Dies or becomes mentally or physically incapacitated
• Sells his or her share to a stranger -- or someone you know well but can't stand

If you haven't made a sound agreement to anticipate and deal with these issues before they happen, you risk having a serious personal and business problem that will need to be fought out in court or even result in the demise of your company. Heed these examples.

• You may be forced to share control of the company with an inexperienced or untrustworthy stranger who buys the interest of a departing co-owner.
• You may be forced to work with the spouse or other family member of a deceased, disabled, or divorced owner. While this might be fine, there is always the possibility that the family member is inexperienced or inappropriate.
• If you leave the company or die, you or your survivors may be stuck with a small-business interest that no outsider wants to buy and for which no insider will give you a decent price.

What Is a Buy/Sell Agreement?
It's best to set some ground rules ahead of time that owners can look to in a time of strife. That's where buy/sell agreements come in. Contrary to popular belief, a buy/sell agreement is not really about buying and selling companies. A buy/sell agreement is a binding contract between you and your co-owners that defines who can buy a departing owner's share of the business and establishes what price will be paid for that share.

Your buy/sell agreement will consist of several clauses that you and your co-owners choose -- clauses that will instruct and remind you and your co-owners how to handle a potential sale or buyback situation during a change of circumstance. That change could be a shift to an owner's personal life, such as death, divorce, or a financial problem. Or it could be the result of a business-related turn of events, such as a disagreement between co-owners. And, of course, at a time when many people demand that their work be both profitable and personally meaningful, it might occur simply because a co-owner feels like doing something else. A buy/sell agreement may act as a lifeline when there is:

• An attractive offer from an outsider to purchase an owner's interest in the company
• A divorce settlement involving an owner in which an ex-spouse stands to receive an ownership interest in the company
• The foreclosure of a debt secured by an ownership interest
• The personal bankruptcy of an owner
• The disability or death of an owner

When one of these circumstances happens, your buy/sell agreement kicks in to protect your current way of doing business. For instance, you might choose to include a clause that states, " If an owner decides to leave the company, the company shall have the right to buy that owner's interest at the price stated in the buy/sell agreement." This clause protects the remaining co-owners by eliminating the possibility that the owner who is pulling out will sell his or her share to an unsuitable new owner. You'll select such clauses to go into your buy/sell agreement depending on several factors, including whether you want to keep your company very small and private, how long you expect your business to last, and whom you expect to succeed you when you die. When you're creating a buy/sell agreement, allow plenty of time for discussions with your co-owners -- talk, argue, and speculate about future possibilities.

Setting Prices in Advance
Preparing rules to guide future situations is only part of the equation. Setting a price at which ownership interests will be transferred is one of the most important parts of a buy/sell agreement. Without establishing a price for the company in advance -- or at least a formula for setting this price -- lengthy disputes and lawsuits can arise over the value of an ownership interest. Not only are these disagreements almost sure to result in personal ill will, they may even disrupt the ongoing business to the point that the company loses its edge or even falls apart.

No doubt, it can be difficult to put a value on a small or family-owned business. You can add up the worth of property, equipment, and accounts receivable, but what about the value of your customer lists and your business's reputation? Should these get factored into the equation? And, of course, whatever number you come up with, a departing business partner might have a different idea of the company's worth. These are all questions that should be answered when you and your co-owners sit down to create a buy/sell agreement.

Likewise, a company that doesn't plan how it will pay a departing owner or his or her family can be in for trouble. Having to come up with a large, lump sum payment out of the blue can sink a company. For instance, if an owner demands that the company buy back an interest and pay for it on the spot, your company may need to borrow the cash or liquidate assets to make the payment. Fortunately, in addition to providing a way to value an ownership interest, a good buy/sell agreement can set forth the mechanics of a buyout -- including the specific payment terms and the source of the funding. It's often far better to provide in advance that a departing owner can be paid in installments over a period of years. Another alternative is to tie the buy/sell agreement to the purchase of life or disability insurance for each of the business owners -- and then use the proceeds to buy an owner out. Without a funding mechanism and a reasonable payment plan, in some cases your only other option might be to file for bankruptcy -- something you surely want to avoid.

After making choices about who can buy and sell ownership interests under what circumstances and at what price, and then putting them down on paper, your buy/sell agreement will probably sit in a file cabinet until a co-owner needs to part with an ownership interest. At that point, you and your co-owners will get together and, if you're lucky, come up with a fair way to transfer the departing owner's interest. But if any disagreements arise, you'll have to dig

Why Your Small Business Should Create a Buy-Sell Agreement

Say you own a company with your business partner John. You’ve formed it legally, have bylaws, file taxes regularly, and everything seems fine. Then, suddenly, John goes bankrupt and gets divorced.

What happens to his half of the business? Does it go to his wife in their settlement? His children? Do you own the whole thing now? Is it worth half as much? Just how do your protect yourself and your business from unforeseen events like these? 

The best way is to create a Buy-Sell Agreement. 

You can think of a Buy-Sell Agreement as a business’s will or prenup. It sets out how the business will deal with a unforeseen circumstances, like the death, retirement, disability, or bankruptcy of an owner. Basically, it governs what happens if an owner is forced to leave the business or chooses to do so of his or her own free will. When you create a Buy-Sell Agreement, you're choosing how the co-owners of your company can sell their share of the business, including to whom and the for what price. 

Every business should have one. 

You should create a Buy-Sell Agreement tailored to your specific business and to meet your specific needs. You can, for example, make a provisions that govern whether the owner or the business itself purchases the portion given up by the ex-owner. You can choose to include language that allows insurance policies to pay or name a hopeful buyer for your portion of the company if something unfortunate happens.  

Importantly, Buy-Sell Agreements prevent your co-owners from transferring their share of the company to parties you don’t want taking ownership. If your co-owner gets divorced, for example, the owner’s spouse could get control of the that owner’s share unless a Buy-Sell Agreement is in place. 

Even outside life’s unfortunate tragedies, a Buy-Sell Agreement is valuable. Say a co-owner is simply burned out on the business. Your agreement can spell out who the share can be sold to, or, as is quite common, include a provision allowing remaining owners to repurchase the ownership share. 

Buy-Sell Agreements are incredibly important. They should be created as close to the inception of your business as possible. Moreover, Buy-Sell Agreements are appropriate for every business entity, from corporations to partnerships and even proprietorships. 

How to Sell Your Small Business

If you've spent years — maybe even a lifetime — building a small business and are starting to think about retiring or cashing out, now may be a good time to sell.

The median asking price of businesses for sale grew 12.5 percent in 2015 to $225,000, up from $200,000 in 2014, according to BizBuySell.com, an online marketplace with more than 40,000 business listings for sale. The entities are selling on average for about two to three times their annual cash flow and at 90 percent of the asking price, according to the website.

"A lot of higher-quality businesses are hitting the market as sellers are seeing the success of others in the marketplace," said Bob House, general manager of BizBuySell.com and BizQuest.com, which together have about 76,000 businesses listed for sale.

Ideally, owners should begin getting their businesses ready to sell at least a couple of years before they hope to close a deal, House said, to slowly wean themselves from the day-to-day responsibilities and getting it in tip-top financial shape. 

Think it over, then think it over again

Many sellers make the mistake of not having clear business and personal objectives for once they sell, said James R.F. Berkeley, managing director of the London-based business consultancy Ellice Consulting.

"In family and small businesses you'll often hear about 'seller's remorse,'" he said, noting that sellers haven't figured out what they'll do next. They worry about their customers and employees, and wonder if they sold at the right time.

"The ideal time to sell is when there is a peak in market activity, in your own profits and in your market sector. Many sellers hang on for a perfect time that never comes, losing sight that their goal should be a successful, not perfect sale."

Enlist the help of advisors

Though it is not necessary to hire a business broker, who may charge as much as a 15 percent commission on the sale price of the company, a broker will spend the time vetting buyers, ensuring confidentiality of the process and answering questions so you can focus on making money, House said.

You'll also want to enlist the help of an accountant to prepare financial paperwork, and a lawyer to help you review offers, contracts and deals.

Get your financials organized

A diligent buyer is going to want up to five years' worth of profit and loss statements, bank statements, tax returns, leases, supplier and vendor contracts, and customer data, said Barbara Findlay Schenck, a business strategist and author of "Selling Your Business For Dummies."

Make sure the paperwork looks clean, organized and clear so that it is representative of a well-managed company and so that you do not inadvertently mislead the buyer. "You can't sell a business with records in a shoebox," she said.

Transfer assets that won't be sold

Once you know you're going to sell, begin transferring assets into your personal name if they will not be sold with the business, such as cars, intellectual property and real estate, so they're off the expense column of the balance sheet, Schenck said. This will show the buyer a clearer picture of cash flow potential.

Justify the price

"Sellers forget that the value of their firm is the value of the firm tosomeone else," Berkeley said. Businesses are often priced as a multiple of either their revenue or cash flow, which varies by industry and size.

The average small business is priced about two times annual cash flow, but as cash flow increases, so does the multiple. Businesses with a cash flow under $100,000 received a sale price of about 1.97 times cash flow. Those showing between $300,000 and $500,000 exhibit a multiple of 2.81, according to BizBuySell.

A premium can be charged for a firm with either a pipeline of business booked in the immediate future, a 25 percent annual sales growth trend, or proven repeat business, Berkeley said.

A savvy buyer is not going to care about cash flow only.

"You want to look at your own company in an objective manner ... do you have a salient business strategy?" said Ronald Recardo, managing partner and business strategist at the Catalyst Consulting Group.

"A lot of companies make money in spite of themselves. [Buyers are] going to look for the quality of leadership and whether you are differentiated." That means presenting the buyer with a plan for how the business could grow and flourish over time.

Work yourself out of the business

If the company looks like it is dependent on you or a few key staff, a buyer may believe the potential for its growth will go away when you do, Schenck said, so take time to ensure it can run without you as its face.

Business Valuation Calculator: How Much is my Business Worth?

Business Valuation - Discounted Cash Flow

Business valuation is typically based on three major methods: the income approach, the cost approach and the market (comparable sales) approach. Among the income approaches is the discounted cash flow methodology calculating the net present value ('NPV') of future cash flows for an enterprise. As an alternative to the more abbreviated income capitalization approach, this methodology is more relevant where future operating conditions and cash flows are variable or not projected to be materially consistent with current performance levels.

Use the calculator now.  Click here.


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What is a Buy-Sell Agreement?

According to Wikipedia, a buy–sell agreement, also known as a buyout agreement, is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business.

It may be thought of as a sort of premarital agreement between business partners/shareholders or is sometimes called a "business will". An insured buy–sell agreement (triggered buyout is funded with life insurance on the participating owners' lives) is often recommended by business-succession specialists and financial planners to ensure that the buy–sell arrangement is well-funded and to guarantee that there will be money when the buy–sell event is triggered.

Clauses

A buy–sell agreement consists of several legally binding clauses in a business partnership or operating agreement or a separate, freestanding agreement, and controls the following business decisions:

• Who can buy a departing partner's or shareholder's share of the business (this may include outsiders or be limited to other partners/shareholders);
• What events will trigger a buyout, (the most common events that trigger a buyout are: death, disability, retirement, or an owner leaving the company) and;
• What price will be paid for a partner's or shareholder's interest in the partnership and so on.

Buy–sell agreement can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan. For greater neutrality and effectiveness of the buy–sell arrangement, the service of a corporate trustee is recommended.

Interested in learning how to maximize the sale of your business WITHOUT business broker or M &A fees?  Click here now.

How Much is Your Business Worth?

Revenue is the crudest approximation of a business's worth. If the business sells $100,000 per year, you can think of it as a $100,000 revenue stream. Often, businesses are valued at a multiple of their revenue. The multiple depends on the industry. For instance, a business might typically sell for "two times sales" or "one times sales." If you have a good stockbroker, he or she may be able to help you research typical sales multiples for your industry. A good business broker can also help you if he or she has done valuations in the industry you're investigating.

But alas, revenue doesn't mean profit. If you're in doubt, just look at Amazon.com: It had 2002 sales of almost $4 billion, but no profit. In fact, it hasn't made one cent of profit since the day it was founded. How much would you pay for an ongoing $4 billion per year that you have to pump an additional $380 million per year into just to keep it afloat?

That's why earnings matter and why multiples of earnings may be a better way to think about valuation. If a company had a profit of $10,000, that cash can be used for growth or dividends to you, the shareholder. Estimate the earnings for the next few years and ask how much that income stream is worth to you. Be careful, though. Don't just assume earnings will be stable. Competition, supplier price changes and a declining industry can affect earnings. Make sure to reflect that in your projections.

Warren Buffett uses what's called a discounted cash-flow analysis. He looks at how much cash the business generates each year, projects it into the future and then calculates the worth of that cash flow stream "discounted" using the long-term Treasury bill interest rate. There's no room to explain the theory or calculation here, but you can do it in Excel using the NPV "net present value" function.

One quick and dirty technique is to divide the current yearly earnings by the long-term Treasury bill rate. For example, if the shop earns $10,000/year and T-bills are returning 3 percent interest, the business is equivalent to $333,333 worth of T-bills ($10,000/3 percent=$333,333, so $333,333 invested in T-Bills would return the same $10,000 income). So if you had $333,333, you could earn your $10,000/year by investing in T-bills with a lot less effort than running the shop. This technique puts an upper limit on your valuation. After all, why would you spend more than $333,333 on a store when you could earn more by spending the same money in T-bills? Of course, using this quick-and-dirty technique assumes that the teashop will have the same earnings year after year, and assumes that only monetary return matters.

These techniques-asset valuation, sales multiple, earnings multiple and cash-flow analysis-value the financial side of the business. Non-financial considerations also come into play. You might pay more for a teashop if it's next to a restaurant you own, since the combined business may be worth more. Or maybe you've just always dreamed of owning a teashop. Be careful with letting your dreams influence your valuation too much, however. My friend Vinnie always wanted to own an occult supply store. He got his wish, but not a good valuation. It cost him years and much heartache to dig his way out of the situation.

I hope these ideas give you a head start in valuing the business. I'd also recommend you get your banker involved in the valuation. Since your banker will be helping finance the business, he or she will have a good sense of how to do a good valuation for shops in your area.

Interested in learning how to maximize the sale of your business WITHOUT business broker or M &A fees?  Click here now.

Why You Need An Appropriate Exit Planning Strategy Now

According to Wikipedia, Exit Planning is the process of preparation for the exit of an entrepreneur from his company while maximizing enterprise value , and thus his shareholder value, during the mergers and acquisitions transaction.   Other non-financial objectives may be pursued including the transition of the company to the next generation, sale to employees or management, or other altruistic, non-financial objectives.

Exit Planning FAQ’s

When Should I Develop My Exit Plan?

As odd as this may sound, you should begin your exit plan when you start your business.  The first part of the exit planning process involves growing a profitable business that would be attractive to potential buyers or new owners.  Growing a profitable business from day one means you are always in a position to exit your business.  Likewise, developing business habits that make your business due diligence proof and protect your valuable business relationships contribute to having a healthy business.

Having said that, if the exit plan has not been started a three-to-five year period is an ideal time frame to start the exit planning process to sell or transfer to a new owner.

How Do I Know I am Ready to Exit my Business?

You don’t know.  And that’s the problem.  Exiting a business may not be optional.  You may suffer an accident or debilitating illness and be forced to exit.  Many business owners remain in the business long after the business has reached its peak.  Buyers are looking for growth and when the business owner attempts to sell after the business has maximized its earnings potential, the business owner risks not selling the business or, at the very least, selling for much less than it could have otherwise been sold.  There’s no time like the present to begin the exit planning process. 

Who Do I Need to Create my Exit Plan and What Do They Do?

Just as it takes a team to sell a business for maximum profit, it takes various resources to create and sustain an exit plan.  A few of the resources needed include:

• Business Transaction Attorney – to offer advice regarding tax and estate planning matters and to prepare critical documents
• Certified Public Accountant – to calculate business tax basis, prepare financial and tax projections
• Financial Planner – to prepare cash flow projections for personal budget/needs post sale or transfer
• C.F.O – to assist with business budgeting, projections, and financial reporting
• Exit Planner or Exit Planning Training – to educate, guide and facilitate the Transition Planning phase to develop the Exit Strategies to  develop a Succession Planning Road Map that keeps all of the above professionals heading in the same direction!

In simple terms, exit planning is a three phase process undertaken by a business owner as he considers transferring ownership to another business or individual(s).

A variety of terms are used by professionals and entrepreneurs alike to describe exit planning.  They may include:  transition planning, exit strategy, and succession planning.  None of these terms define or encompass the full exit planning process.  Instead, each term is a phase or component of the exit planning process.

Let’s break down its three parts.

1. What is Transition Planning?

In the first phase of an exit plan, the entrepreneur initially devotes resources to improving the value of his business in the eyes of a prospective buyer or new owner.  It is logical to believe a prospective buyer or new owner will pay more for a business if it is profitable over time.  Accordingly, growing the business and increasing its profitability in the three-to-five years preceding its sale makes good financial sense.  Various measures of profitability are used in the transition planning process including: EBITDA, EBIT, and Enterprise Value.  These measures are also used when the business is sold or transferred to a new owner.

Proactively preparing the business for buyer’s due diligence during the sale process is also part of the transition planning process.  Likewise, taking steps to protect the relationships a business has with its customers, employees, and suppliers is necessary during the transition planning process.

A thorough transition plan for most businesses takes one-to-two years to accomplish.  In phase two of the exit planning process, the entrepreneur’s exit strategy should be developed.

2. What is Exit Strategy Planning?

In order to develop an exit strategy, the entrepreneur must consider his own personal objectives which may include financial goals, business culture, and/or matters of legacy.  Each entrepreneur wants to keep his exit promise on his own terms.  So the development of the entrepreneur’s exit strategy involves matching the “right fit’ new owner with these objectives.

There are a variety of paths to exit business ownership and they include:

• Sale to a Third Party
• Sale to Co-Shareholder, Partner or Co-Member
• Sale or Transfer to Insiders or Management Buyout
• ESOP – Employee Stock Ownership Plan
• Sale or Transfer to Family Members
• Investment from Venture Capital Firm
• Investment from or Sale to Private Equity Firm
• Investment from Angel Investor
• Investment from Mezzanine – Convertible Debt and/or Equity
• Bankruptcy
• Liquidation

Each of the exit paths noted above have different tax consequences and all may be structured in a variety of ways.  Estate and tax planning is imperative during this phase of the exit planning process.

There are times when the entrepreneur’s personal and business objectives are at odds.  For example, if the entrepreneur wants the new owner to keep the business in its present location while receiving top dollar for its sale, discussions with an international buyer willing to pay a higher price and with intentions of plant relocation would not be a ‘right fit’.  In this example, the top dollar sales price objective conflicts with the desire to keep the business in the same town post sale.

The development of various exit strategy scenarios allows an entrepreneur to begin thinking realistically about   potential buyers or new owners in the context of his personal objectives, before the selling process commences.  This effort saves precious time and resources when the business ultimately is put up for sale or is transferred.

3. What is Succession Planning?

This third, and very important phase in the exit planning process, addresses the need to replace any owners and/or management team members who may exit the business after the sale or transfer occurs.  Succession planning is vital for the longevity and long term financial success of the buyer.  Replacing executive-level talent is not as simple as hiring new employees.  In many cases, the business’ owners and executives hold extensive knowledge and, without proper succession planning and its careful execution, the business may ultimately fail.

 

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