In addition to wanting to know what their small business is worth, small business owners want to know what costs to expect when exiting their small business. A lot depends on how you plan to exit. If you plan to find a buyer you will have expenses related to marketing the business which is not the case if you plan to sell to an employee or business partner. If you are planning to sell the assets and dissolve, the legal and accounting resources are not the same as selling the business.
The more preparation you do yourself, the less you may spend on expert resources. If you want to learn more about what costs to expect and how to save hundreds and potentially thousands of dollars, read on.
The costs involved in selling a small business
There are different strategies for exiting a small business including:
- Selling the business to a third party
- Selling the business to an employee
- Selling your portion of the business to a business partner
- Employee stock ownership plan (ESOP)
- Selling the business to a family member
- Selling the assets and dissolving the business
Depending on the path you plan to take to exit your small business will determine the resources you will need and the major expenses you may incur.
Over 40% of small business owners plan to sell their business to someone they know such as a business partner, employee or family member.
Getting a professional valuation
There are different ways to obtain a small business valuation and there are different methods to generate the valuation. The most common method for businesses that have less than $5 million in revenue is Seller’s Discretionary Earnings (SDE). Online services and tools can provide an estimated value based on information entered by the owner, oftentimes the results are immediate and good for starting the process. If a more robust valuation is needed to meet the demands of a buyer or a bank or investors lending money to the buyer, hiring a CPA or analyst to perform a valuation is needed. If the buyer is seeking an SBA loan, the bank will require a valuation as well as other financial information and tax returns.
A financial professional will typically charge an hourly rate that may range between $75 to $125 an hour depending on the market and level of experience and expertise. Most will not want to charge a flat rate unless they have a clear understanding of the state of the financial information needed to perform a valuation. Oftentimes there is a need to clean up your records, enter missing data and there is some back and forth just to have a clear picture making it difficult to estimate how many hours are needed to get all the pieces together. Asking for an estimated range of time will give you a better sense of the total cost. You can learn more about how small business valuations are calculated here.
Listing your business on a website to attract buyers
Listing your small business on a popular website is tempting and may be a good investment but there are some things you should consider before you make that commitment. While the price is listed as monthly, there is a minimum commitment for at least three and more often six months. There are also tiers so if you want to get more exposure, you need to pay the higher monthly fee and typically using a listing site will cost at least $400 and probably more. While millions of visitors sounds great, think about the likelihood of someone visiting their site in another city or state and if that is who you want to reach. A lot of small businesses have local customers and suppliers and a potential buyer is likely to come from the local community. Practically speaking, you may be better off using local resources to market your business to potential buyers.
While millions of visitors sounds great, think about the likelihood of someone visiting their site in another city or state and if that is who you want to reach.
Engaging a small business broker
Hiring a business broker is an option for some business owners. Typically a broker will get 15% of the sale price and as the saying goes, the devil is in the details. A good business broker that makes their living based on the actual sale of a small business will focus on businesses they believe they can successfully sell. Most specialize in an industry such as bars & restaurants, medical offices, retail or e-commerce business where they have both expertise in how the business operates and the broker has a network of people that will lead to qualified buyers. Additionally, a good broker will focus their time and energy on bigger businesses, typically those worth at least $5 million. It takes time to prepare the valuation, marketing materials and reach out to potential buyers and if the time and effort is about the same to sell a business worth $650,000 versus a business worth $6,500,000, you can see where they will commit their time.
Before you engage a broker and agree to pay 15% of the selling price, it is important to understand how the fee is structured. It is very common to pay part of the fee up front or as a retainer that is non-refundable and will count towards their total fee if and when a deal closes.
|Estimated sale price of business.||$6,500,000|
|Total estimated broker fees 15%.||$975,000|
|Estimated due at closing.||$925,000|
This is to cover their costs and time during the months it will take to prepare, market and close a transaction or in the event they are unable to find a buyer at a desired price. There are a variety of reasons a business does not sell that are beyond the control of a good business broker and more importantly, a successful sale requires time and input from the business owner. Aligning incentives and how fees are structured is important as well as setting expectations of what level of support you can expect from a business broker and what she needs from you to best position for a great outcome.
Hiring an attorney
An ExitGuide survey reports that over 40% of small business owners plan to sell the business to someone they know. This may be a business partner, employee or family member. While familiarity and trust are well established, it is important to make sure both seller and buyer are happy with the terms and conditions of a deal well after it closes. There are a number of important details to document including sale price, financing terms, transition period just to name a few. One of the most common questions is what sort of legal expertise is needed. Asking your current business lawyer to help is an option or you can engage an attorney such as SMB Law Group that specializes in the sale of small businesses. As you expect, fees vary and it is reasonable to assume at least $250 or more per hour.
How to reduce the cost of selling your small business
There are steps you can take that will likely save you hundreds if not thousands of dollars.
For sale by owner is a common approach and eliminates the cost of hiring a business broker. This approach is not just for owners that have a buyer ready. You are probably the best person to represent the business and sites like ExitGuide provide templates to customize to market your business as well as step by step guidance on what information you will need to navigate through the process.
Review your financial records and identify errors. Correct what you can and reduce the amount of time it will take a bookkeeper or accountant to make adjustments.
Find your business formation documents as well as loan agreements, lease agreements and other important legal documents. After you review, create a simple document that summarizes key terms, outstanding balances, time left on lease. No need to pay a lawyer to tell you what you already know.
Gather three years of tax returns and ensure the business is current with both state and federal filings. If you find that you have an outstanding balance, pay immediately or develop a plan to pay down.
There are several exit strategies for small business owners and a number of resources available to learn, plan and complete a successful exit. Depending on your situation, you may choose to engage various professionals to help you prepare, market and sell your business or you may want to reduce the fees by taking time to update and prepare information or handle things on your own. To learn more about options and exit strategies, check out our Resources section.