The decision to sell your small business can change the course of your entire life. To ensure the process is as smooth and successful as possible, you’ll need to meticulously prepare — years in advance, if possible. The complicated multi-step process of selling your small business can challenge you financially, logistically, and in some cases even emotionally. And on top of all that, finding a new owner for your business takes time. According to surveys by Morgan & Westfield, once you create your real estate listing, it will take three to twelve months on average before a deal closes.
Broken down by industry, here are the average times small businesses are on the market before selling:
- Communication: 6.4 months
- Transportation: 6.8 months
- Retail: 7 months
- Services: 7.1 months
- Insurance, Finance and Real Estate: 7.2 months
- Manufacturing: 8.1 months
- Wholesale: 8.1 months
- Electric, Gas and Sanitary Services: 8.2 months
- Construction: 9 months
But these numbers only represent businesses that actually sold. According to Worldwide Business Brokers, “Main Street Businesses”—which have revenues of less than $1 million and represent approximately 80% of businesses in the United States — often never sell no matter how long they stay on the market. Only 1 out of every 5.5 businesses in the “Main Street” category listed in the study (a little less than 20%) found a new owner in the end.
However, don’t let these somewhat daunting statistics discourage you. There are plenty of steps you can take to stand out from the crowd and successfully sell your business, even if the odds seem stacked against you.
Here are seven key best practices to help you on your journey.
1. Think like a buyer, not like a seller
Many small business owners are confident their company is valuable, especially if it provides a solid living for them and their employees. But whether you own a thriving juice café, operate a profitable plumbing supply business, or are the mastermind behind a popular boutique clothing store with both online and physical presences, you must keep a buyer’s mentality when preparing to sell. It all leads back to calculating what would be easier and more cost-effective: buying your business, or building a similar one from scratch.
One of the biggest points in favor of buying is you’ve done all the hard work already, and the business is ready to roll. Also, you’ve proven your concept works in a real-world market and location (even if the “location” is in cyberspace). So buyers know there are many advantages to buying from an established business owner (a.k.a. you) rather than going in blind.
Here are some other perks that will make buyers come running:
- You might have a tremendous amount of local goodwill in your community that would take time and effort to replicate.
- You may have a well-oiled machine proven to deliver quality products to customers swiftly.
- You may have an existing, loyal customer base, which is invaluable.
When it comes to selling your business, do your own due diligence. Approach every meeting as a buyer would and always be prepared to answer questions. Have relevant data that proves the value of your business on hand and make sure you focus on evidence-based facts instead of relying on anecdotes. By answering all the hard questions before a sharp buyer asks them, you can shorten the time to close once the right person comes along.
2. Get a price estimate from an expert
How do you determine the worth of your business? Most small businesses sell for three to six times their annual cash flow. But in order to get an accurate estimate for your unique situation, consult a valuation expert. They’ll examine your earnings before interest, taxes, depreciation, and amortization (known as EBITDA for short) to create a clearer picture of your business’s value. A valuation will also take cash flow into account. That means if you are bringing in a lot of revenue but are low on cash, your business will get a lower valuation.
An expert will also consider non-financial aspects of your business. This includes many of the factors we discussed in point #1 that will make a potential buyer think it’s smarter to buy rather than build. Do you have a strong employee team? Have you successfully used technology to automate critical tasks? Hire a business appraiser to get a detailed report on what your company is worth, and why. This will make your asking price much more credible.
3. Improve your profit margins
Buyers are always on the prowl for profitable businesses. Too many small business owners concentrate so much on selling their businesses they forget about this and put revenue on the back burner during the selling process. Don’t fall into this trap. You need to keep pushing your business to excel and grow if you plan on finding a decent buyer. Trimming costs and growing margins is integral when it’s time to sell. If you can demonstrate that your business is still growing financially even though it’s up for sale, that will attract more buyers—and a higher selling price.
4. Highlight recurring revenue
The number one perk a buyer wants to see in a small business is a loyal customer base. Highlight existing subscriptions you have, large corporations you’ve worked with, and contracts that have been renewed annually. Be prepared to explain why customers come to you year after year, and how you stand out from the competition. If you work in a creative profession, make sure your portfolio is in pristine shape. Setting the groundwork for a good business model many years in advance will make selling your company much easier when the time comes.
5. Take yourself out of the business
If you work an industry where your own unique flair is the cornerstone of the business (think hairdresser or chef), the buyer needs to feel confident the business will continue to be successful without you in the picture. If you’re the main draw to the business, a would-be buyer might question whether they’ll continue to thrive without your presence. So find ways to make your business less about you.
If you’re a hairdresser or another creative professional, hiring an apprentice and passing down your favorite techniques is a great way to do this. In other industries, you can hire a manager to oversee day-to-day operations and become the new face of the business. Keep a close eye on things, but slowly transition your skills and knowledge to someone else who can help your business thrive. Your business will be infinitely more attractive to buyers when they see it isn’t a one-person operation that’s going to fall apart the moment you walk out the door.
6. Get all your documents in order
This is the hard part. Before you even consider selling your business, you need to make sure your records are immaculate. There are going to be many prying eyes on your bookkeeping, employee records, contracts, and especially your tax statements. Outside accountants, valuation consultants, and lawyers you’ve hired will also be scrutinized.
To keep this process from turning into a nightmare, if you don’t already have an accountant, hire one. As part of the sale, you’ll have to provide three years of tax returns, financial statements, and revenue records (at a minimum). Ensure you have records pertaining to any intellectual property (IP) such as patent applications and grants. If you’ve been involved in any legal actions, or are missing paperwork, be prepared to explain. Get proof of your compliance with privacy and security regulations as well.
Your business needs to be an open book to the buyer throughout the entire selling process. In short, all the things small business owners hate doing must be completed to perfection. Of course, this will take time—maybe even a year or longer.
Don’t be afraid to hire all the experts you need to make this arduous process go as smoothly as possible. And most importantly, make sure all of your records are easily accessible when the time comes for any real estate agents, banks, or potential buyers to review them. Consider storing your data in the Cloud on a secure single platform (there are many of them) so anyone you authorize can access your files remotely.
7. Think about selling to your employees
In many cases, you don’t have to look far to find potential buyers for your business. If you have employees who really know and understand the business and genuinely care for it, they could be the perfect purchasers. If you’re slowly working towards selling your business over a period of several years, look to hire employees who show interest in taking the business on and learning its inner workings. However, recognize employees will rarely have the cash to pay what your business is worth up front. So be prepared to finance them over a period of time. Yes, this delays your full payout, but you’ll have the satisfaction of seeing your business live on and thrive in good hands.
The key to selling your business is staying patient
It’s never too early to start planning the sale of your business. You’ll need plenty of time to get your books in order, to make sure your finances are on track, and to emotionally prepare for letting go. Be patient and take the time to master every aspect of your business and to explain to potential buyers how you achieved success. You’ll also need to answer some harder questions, like why other times you might have fallen short of your financial goals. Having all these facts at your fingertips will make everything much easier when it’s time to negotiate with buyers and ensure that the sale goes as smoothly as possible.