Crain's New York Business
Time-and-Money-Saving Tips For Selling Your Business
By Tina Traster
July 13, 2008 - Dueling attorneys tried for six long months to close the sale of home-fragrance business Slatkin & Co. to a publicly traded retail conglomerate. Finally, founder Harry Slatkin flew to Ohio. Over steak and wine, he and an executive of Limited Brands sealed the deal, ironing out small but sticky details about terms and conditions.
"To close the deal, you have to sit with the buyer and work through your concerns," says Mr. Slatkin, who reportedly sold the company for $13 million in 2005 and now is president of Home Designs at Limited Brands. "If we had not met face-to-face and melted away the tension, the deal would never have happened."
It is not easy for an entrepreneur to sell a business—it's like watching a teen leave for college. After years of nurture, energy, time and money, business owners must detach themselves emotionally from what they've built to create an objective plan for selling, particularly in tough economic times.
Here are tips to follow if you are considering selling your business now.
Assess reasons for selling the company. Be 100% sure about the decision, especially when a downturn may deflate the price. Define the goals: Is the plan to sell the company but remain involved? Is it to get enough cash to start another company? Perhaps retirement beckons. Unfortunate circumstances such as illness, divorce or relocation may make a sale the right option.
One thing to consider: Selling one business doesn't mean losing your identity as an entrepreneur.
"At first we were looking for financing to take the business to the next level," says Colby Sambrotto, former president of For Sale By Owner, on online sales market. "But the Tribune Co. wanted to buy, not partner. Unexpectedly, I ended up working there for a year, which gave me perspective on how the big guys do business. That helped me launch BizTrader.com, which helps businesses find the professionals they need to navigate a sale."
Find out what the business is worth before entertaining offers. Set aside emotional presumptions and get a formal business appraisal. Particularly in tough economic times, it is important to price the company in line with the market. Keep in mind that buyers will be more attracted to growing companies that can demonstrate a good track record. A strategic time to sell is when the company's industry is hot and trendy.
To prospective buyers, guaranteed income streams appeal more than sales forecasts. Increase leverage in the negotiations by locking in licensing fees, retainers or other contractual arrangements before putting the business up for sale.
Choosing the wrong time to sell—or waiting until you are forced to—can be a costly miscalculation.
The one-two punch of the dot-com bubble and Sept. 11 forced Edward Rosenfeld to sell his family's business, International Furniture Rentals, in 2005 to Cort Furniture Rentals. "The sad irony was that we had an offer in 1999, but my father, who started the company in 1968, was not willing to sell," says Mr. Rosenfeld. "By the time we did, the company was worth 40% less."
Prepare a packet of financial information that accurately reflects the business's financial condition. The packet needs to include an adjusted balance sheet and a statement of the company's discretionary income. Have an accountant prepare a spreadsheet that shows the numbers from the business's last three tax returns, with adjustments for back salaries, depreciation deductions, contributions, interest expenses and interest income. The adjusted balance sheet will reconfigure the company's assets to fair market value and eliminate assets and liabilities that a buyer will not acquire, such as cash and leased equipment.
Experts advise setting a price that leaves a 10% to 30% margin for negotiation.
It takes nine months on average to sell a business, and a business owner cannot afford to be distracted from running the business over that span of time.
Bring in the pros—a lawyer, accountant and business broker. A seller stands a better chance of getting fair value when he or she has good broker representation.
Ask an accountant or attorney for a broker recommendation, and interview at least three brokers before choosing.
Search BizBuySell.com or scan the members of the International Business Brokers Association. Ask for references. Brokers should have the Certified Business Intermediary professional designation. Their services may include valuation, marketing, due diligence, negotiation and closing. broker take an average of 10% of the selling price, but the cut varies.
"The 7% that Sun Mergers & Acquisitions took in commission was worth every penny, because I could not have navigated the deal by myself," says Scott O'Rourke, who sold Park Hill Chemical of Mount Vernon, N.Y., in 1997.
Not every prospective buyer is serious—or even sincere. Screen buyers in advance through careful interviewing and financial vetting. After boiling down the list, require prospective buyers to sign a confidentiality agreement before handing over sensitive company documents. Leaking news of a sale prematurely can hurt a company's operations, and even the final sales price.
See if employees or managers want to buy the business. Sales to employees can be accomplished through Employee Stock Ownership Plans, tax-qualified employee benefit offerings. The tax advantages are a boon to owners who want to sell only a part of their business.
The sale of most small businesses involves some seller financing, especially in a down market. Buyers usually are willing to pay a higher price for the business when there is seller financing. Sellers willing to take risks give a buyer confidence that the business is profitable and viable. In turn, the seller continues to profit from the sale through interest.
Bear in mind that seller financing (a term of five to seven years is typical) ties the seller to the business until the repayment term is completed, and you may end up owning the business again if the new owner defaults.
Once an offer is made, it is up to attorneys and lenders to finalize the sale. Make sure the company's professional representation sets deadlines for each phase of the sale, but be prepared to take a personal hand in the deal, as Harry Slatkin had to.
THE FIRST RULE of selling your business during a
recession is to be sure that you need to. The timing of a sale can
drastically affect the price. If you've decided that now is the right
time, do the groundwork by hiring a professional to give you an appraisal
and to prepare the financial statements you'll need to show potential
buyers. If you can, establish revenue streams that will make the business
more appealing. Then, be patient and be wary of tire-kickers.
Columns | Essays | HuffPo Blog | Newspapers | Magazines | Business/Finance | Travel | About Me | Contact