The following article was originally published in "Business Ventures" magazine:
"Selling a Small Business"
By Mark A. Wood, President, VMW Business Brokers, Inc.
For the average small business owner, selling a business may be the transaction of a lifetime. Although experts at running and nurturing their companies, small business owners typically are not familiar with the process of preparing for and selling a business.
The following summary provides an overview of the elements surrounding selling a small to mid-sized privately held business.
Confidentiality: When one wants to sell their home or investment property you want the whole world to know about it. You put out a sign and advertise the details of the property everywhere you can. The more exposure that you get, the better you feel about the chances for a quick sale at a good price. When it comes to selling your business, advertising that your firm is on the market creates an air of uncertainty that can be detrimental to your bottom line and even put the company in jeopardy.
For example, employees may begin to worry about their job security, or how they will get along with a new owner. The best, most marketable employees are often the first to leave, before you have a chance to reassure them that, in the long run, the changes will be good for them and for the company. In addition to the normal disruption to the business, you may lose potential buyers, as well.
Customers may also become concerned with supply chain issues and have questions about quality from the new owner. Once creditors learn that the business is for sale, your terms of net 30, 45 or more may be adjusted and notes unexpectedly called due. Word of an impending sale also may open the door for predatory competition. Some companies may use the impending sale as ammunition to bring that business to their company.
Considering that the average business sale takes from about six months to one year to complete, if even some of these changes occur early on, the impact can be dramatic. You'll find that you're not just running your business, but also busy with damage control.
Determining Value: Ascertaining the "Most Probable Selling Price" for the company is critical and is much more complex than determining value of other assets such as real estate. It is based on many factors, such as sales, earnings performance, market outlook, personnel, net book value and fair market replacement value of equivalent operating assets. It can also be influenced by intangible assets such as the company's image, reputation and goodwill, as well as the buyer type and terms and structure of the deal. Factors contributing to a positive industry outlook also can help to drive the value of the business and increase its marketability.
The Five Basic Steps in the Sales Process
Step One: Analyze the business and determine its value. In this phase, the business owner is usually trying to decide if this is the right time to offer the company for sale. The most important question is usually "What's my company worth?" We gather the pertinent data, and analyze it to determine the company's Most Probable Selling Price.
Step Two: Plan and develop the marketing program. Many factors guide the development of the marketing program, such as the level of confidentiality required, the size of the transaction and the optimum buyer type that will have been identified in step one. Another important component of the marketing package is a Confidential Business Review - a document that outlines the benefits of owning the company and usually include details such as how the business operates, its past financial performance and future projections for the business and its industry. This is only released to qualifierd buyers after they have signed a strict non-disclosure agreement.
Step Three: Activate the buyer search.
Prospective buyers are screened and qualified for their ability to purchase the business. Confidentiality is maintained by releasing details of the business only after executing a strict non-disclosure agreement that limits potential buyers from revealing any information about the company or its potential sale to anyone except their accountants and attorneys.
Step Four: Negotiations and due diligence.
Most offers typically come in the form of a letter of intent, a brief non-binding document that spells out the basic terms of the proposed transaction. It usually contains several standard contingencies, such as the execution of a formal purchase agreement, the buyer obtaining financing, and the buyer completing due diligence of the business. Three to six weeks is an average time frame for this phase of the process, during which the business is typically off the market and unavailable to other buyers.
Step Five: Close the deal. Congratulations, it's pay day! If the preceding steps were followed properly, closing is now a formality, and the business transfer is completed.
What happens now? Usually, the seller will be available to help the new owner with their transition for an agreed-upon period of time-anywhere from a couple of weeks to a number months, depending on the complexity of the operations and the experience and comfort level of the new owner.
Though some sellers have mixed emotions about letting go of the business they have nurtured and developed through good times and bad, many are excited by the prospect of moving on and enjoying the freedom and financial independence that the sale represents. ■
Mark A. Wood, CBI President VMW Business Brokers, Inc. 703 992-6303
