Whether you are ready to retire, step down or prepare for the next adventure — selling your small business* is more manageable if you understand the process, timing and factors that affect the sale. Most companies can be put up for sale, but to ensure a higher likelihood of getting what you want, preparation and understanding is key.
Although there’s an array of information online on how to sell your business, there isn’t a lot of great information available to help you understand what your expectations should be, in terms of its sale price. During my career at 21st Century Bank, I have advised business owners on how to start, buy, grow, repair and sell businesses. One thing I always encourage my customers to do is start every significant business decision with sound advice.
I am not talking about advice from your broker or another person financially invested in the sale — they can be important to involve, just not for this purpose. I am talking about open, honest information from two or more third parties (perhaps a banker, CPA or business consultant), whose sole concern is what is best for you. Ideally, this advice should be sought at least two to three years before putting your business up for sale. To help get you started, I have outlined a process and points to consider. I welcome you to contact me with any questions you may have.
This requires you to take time to work through some of the more complex aspects of selling your business. Ask yourself these questions:
With preparation, decisions about those discretionary items can be made beforehand to decrease potential complications during negotiations. Essentially, the cleaner the financials and the less adjustments you make, the more likely you are to speed through negotiations and net the final sale price you’re seeking.
Once some range of a cash flow figure is known, then one needs to understand Multiples that businesses in your industry sell for. We call this “comparables.” Just like the case with comparables in terms of real estate sales, adjustments need to be made to reflect the comparison of your business to the businesses that sold.
The combination of your Cash Flow and the Multiple will give you a range of a value that you should anticipate as a Sale Price.
Once you’ve prepared and answered the questions above, consider who you may sell to. Here are some options:
In most cases a private buyer will seek a loan through a financial institution for a large portion of the purchase price. They will couple this bank loan with their own personal cash and potentially, a “seller carryback note” to complete the purchase. “Seller carryback” means that, if the buyer defaults on the bank loan, you will likely have a difficult time receiving the loan balance that still remains on your “seller carryback note” at the time of default. The bank holds a priority position on your business. If you wanted to find another buyer, or reassume operational control, you will need to pay off the bank loan’s priority lien to “own” your business again, before operating it or selling it to another buyer.
It’s important to clarify that all sellers would likely sell to a public company if they had the choice. However, there isn’t always a public company that would be interested in absorbing your business. Then you move to another target — a larger, private company. This is most likely the second-best option for you. If you have exhausted all your options with these two targets, you move onto your third option. Understanding this progression is important because what multiple you receive for your business could be a six multiple if it is sold to a public company, a five multiple if it is sold to a large private company, and a four multiple if sold to a private, individual buyer. This price difference can be large, so this is an important point to understand when talking business Sale Prices.
Managing the sale of your business can lead you to choose to list your business on a broker website. As mentioned, I strongly encourage you to seek the advice of a non-benefitting advisor first, who has experienced the business sales process before and understands sale prices, multiples and adjustments. It’s essential to have the proper knowledge base before proceeding with listing your business on a broker sight.
At 21st Century Bank, our outcome for the sale of a business is to help obtain reasonable, fair and realistic results for both the seller and the buyer. We are here to guide you through the process.
Do we want your business? Sure, we would love to have you as a bank customer, but we instead want to start by being of service and leave it up to you to jump on board if you are pleased with our help. We do not get a commission for helping you sell your business. We simply want to provide thorough advice, possible assistance with connecting you with potential buyers and share any loan program options that could assist the financial sales transaction.
If you have any additional questions, or you are ready to start making plans to sell your business, I would welcome the opportunity to talk with you further.
*(Note: the process outlined in this article refers to small businesses under $3 million, and would not apply to ‘Shark Tank,’ technology (application based), or medical device companies. This article primarily applies to manufacturing, professional/service based, retail merchandise and construction industries).
Jonathan Dolphin, President: Over 20 years of banking experience, with a demonstrated history of building a successful organization through thoughtful planning and a focus on talent acquisition and development. Highly skilled in assisting Small Businesses with their unique lending and strategic planning needs. Proficient in the use of the SBA 504 and 7a loan programs, as well as utilization of Conventional Bank lending programs.
17 Washington Avenue North, Suite 200
Minneapolis, MN. 55401