Most small business owners aim to sell their business someday. According to a PNC Bank survey, 78% of owners plan to sell their business to fund between 60% to 100% of their retirement. If that number seems high, it is, especially as baby boomers seek to exit their small businesses over the next 10 years. By the year 2030, every one of the estimated 74 million baby boomers in the U.S. will be over the age of 65 which will dramatically increase the supply of businesses seeking a buyer.
As baby boomers age out of their businesses, the supply will be greater than at any time in history
If you own a small business, the time to move from thinking about exiting to planning an exit is now. As the saying goes, most businesses are not bought, they are sold. To sell means knowing more than what your business is worth. If you are not sure where to start or what to do, that’s okay. Most business owners have never been through this process before so here are three things you can do to get ready.
This article will cover three basic topics related to exiting a small business.
- What You Need To Get Organized To Exit
- Proactive Steps You Can Take To Prepare For Any Type Of Exit
- Expert Resources: What Type Of Help Is Right For You?
Step1: Organize What You Need To Exit
Maybe you have a buyer already interested in your business or plan to have a family member take over your business or perhaps you plan to find a buyer. Regardless of the situation, transitioning a business to a new owner will require some preparation and this often starts with the following items.
When you started your business, you may have created an LLC, S-Corporation, or C-Corporation. Chances are it has been some time since you laid eyes on these so it may take some time to find them. You will need this to officially transition ownership.
Profit & Loss statements
It is very likely that you will need to obtain a business valuation which will require at least three years of P&L statements. If you use accounting software such as Quickbooks, generating a P&L report (or income statement) is relatively straightforward. A prospective buyer will want to review this in detail so you will want to have this ready to share during the due diligence process.
This is a summary of assets and liabilities and something that a prospective buyer will also want to review. In some cases, a buyer may want to buy only the assets, separating the business entity from its assets. This is known as an asset purchase agreement.
In order to generate a business valuation, you will also need to provide estimated revenue projections for 3 to 4 years. A buyer will want to understand the assumptions behind these projections as well as future one-time expenses for things like purchasing necessary equipment.
A new owner will review important agreements such as a lease, loan agreements, key contracts with customers or vendors so they understand the obligations and responsibilities. Getting these organized into a single folder or secure online file storage will avoid delays in the process.
Step 2: Prepare For Any Type Of Exit
A successful exit starts with preparation. It is wise to develop a plan that organizes the information you need, anticipates what prospective buyers will want and ask, and knows the value of your business based on objective analysis.
Clean up/update financials
Before you look to obtain a business valuation or talk to a prospective buyer, it is important to review your financials and make sure they are up to date, accurate and that taxes and other important financial obligations are current. If your financials have missing information or errors, this will impact your business valuation and can slow down momentum with a prospective buyer.
Document key processes and information
A lot of business owners know the ins and outs of what makes their business work on a day-to-day basis. To help ensure a smooth transition to a new owner, it is recommended you document essential business processes, create a list of key contacts, and summarize important information that helps an owner avoid mistakes. Having this information during the due diligence process demonstrates to a potential buyer that you are prepared to hand over the business and they will not have to come to you for basic information.
Make a list of prospective buyers
You know your business better than anyone and are probably the most qualified to understand who would buy your business and why. In fact, 50% of small business owners plan to sell their business on their own. This means identifying potential buyers and it takes a bit of effort to create a good list. Sites such as Yelp or Google Maps can help jog your memory and add important contact information. Networking in your local community and with organizations like the Chamber of Commerce can also help.
Step 3: Decide What Type Of Help Is Right For You
There are different types of experts that can help you with the process depending on your need. For example, if you plan to pass the business to a family member or have a buyer lined up, you probably do not need a business broker to help you market your business to prospective buyers. Here are the roles some experts can plan in assisting you in this process.
As mentioned above, having up-to-date and accurate financial records is important and one of the first steps to explore. If you are unsure about the accuracy or simply want reassurance things are in order, working with a CPA or professional bookkeeper to review and update your books will not only give you peace of mind, it provides potential buyers confidence that the information they receive has been reviewed by a financial professional.
If you have an attorney you work with for things such as leases, vendor agreements or other business-related matters, it is wise to ask if they have experience with buying or selling business. Getting a trusted referral to an attorney with relevant experience is important if you plan to have an attorney draft a purchase agreement.
A business broker will assist with the entire process of helping you prepare, generate a business valuation as well as find prospective buyers and negotiate the sale. Most brokers will charge between 8% to 12% of a transaction and may require a retainer. If you engage a business broker, ask about their experience with businesses like yours. Are they able to identify potential buyers you cannot access on your own? Will they help obtain a higher sale price?
An exit coach is different from a broker in that their role is to help guide you through a process, whether that is helping you identify prospective buyers or simply navigating through the process of selling to a buyer you have already identified. A coach is not tied to the outcome and is paid an hourly rate or flat fee.
In conclusion, preparing before you need to exit your business will not only help you organize what you need, it can also save you time and money. This is especially true if you plan to engage any expert resources.