Selling your business isn’t like selling your car or even your house. A business sale is a complex process with legal, operational, and financial considerations.
Small Business BC is here to help answer your questions and point you in the right direction as you get ready to sell.
Before we get into some basics about preparing your business for sale, you should know that most business owners get expert help and advice to help facilitate a successful sale. In the future, you will likely want to engage with qualified advisors, including lawyers and consultants, to navigate the complexities of a sale.
Reach out to SBBC if you have questions about selling and exiting your business. Another helpful non-profit resource is Venture Connect. They offer affordable valuation, advisory, and broker services.
It can also be a long journey to sell your business – on average, the entire process takes around nine months, including various stages and negotiations. But your first step is to figure out the value of your business.
Determining the Value of the Business
A valuation is about more than just setting a price tag. It’s about determining the true market value of your business and coming to an MPSP – the most probable selling price.
There are a few common valuation methods, and the one you choose will depend on the nature of your business, its profitability, and industry standards. Here are three common methods:
1. Asset Method
- Valuing a business based on its assets minus liabilities.
- Good for businesses not generating profits or considered non-“going concern” businesses.
- May not accurately reflect the value of a profitable business.
2. Market Method
- Compares the business to similar ones in the industry and geographical area.
- Uses databases to find details of sales for businesses comparable to yours.
- A strong indicator of a business’s value, similar to real estate valuation.
3. Income Method
- Determines the business value based on its income stream.
- Uses past and current earnings to predict future earnings.
- Assumes the buyer will maintain current income levels.
Generally, picking the right method depends on whether your business is generating profits. Profitable businesses may want to use the income method and the market method to confirm findings.
Whichever method you choose, you’ll want to get a professional opinion from an accountant who considers standard industry evaluation practices and benchmarks. Many businesses are valued at between one to three times their annual profit.
Moving forward, you’ll need supportive documents showing your business’s value.
Gathering Documents and Paperwork
You must be organized if you want to sell your business. In this step, you’ll have to put all your paperwork together.
Here’s a list of documents you should put together:
- Financial statements – including your income statements for the last several years and balance sheet statements.
- Lists of equipment and inventory that show the value of the assets, including model and serial numbers of equipment.
- Proof of long-term contracts and a client database.
You’ll also need to prepare some legal documents ahead of the sale, including:
- Non-disclosure agreements (NDAs)
- Lease agreements
- Employment contracts
- Client contracts
- Insurance policies
All of these documents should go into a presentation binder for professionalism. Finally, you’ll want to include a viable, sustainable business plan and transition plan for potential buyers.
Creating a Transition Plan
The sale of your business will affect your business. That’s why you need a transition plan – a strategic, organized approach to manage structural alterations like an ownership transfer of your business.
Having a transition plan with outlined steps and considerations is important for you as a seller and your buyers. A business transition plan could include an overview of the business, a transition team of key stakeholders and their roles and responsibilities, legal and financial considerations, and more.
Creating a transition plan will help manage changes effectively, ensuring all parties are well prepared.
Selling Your Business Tips
With a strong valuation, a presentation binder full of documents, and a clear transition plan in place, you’re all set.
We’ll conclude with some final thoughts about how to make the selling process as smooth and successful as possible:
- Provide the reasons for selling – if you can present your reason for selling the business in the right way, a buyer could be more likely to buy whether the sale is precipitated by retirement, illness, a change in partners, etc.
- Consider separating expenses – especially expenses less relevant to your business, like travel, meals, and entertainment, from your books.
- Do your due diligence on a buyer – assess their ability to run the business.
Rescued from: https://smallbusinessbc.ca/article/how-to-prepare-your-business-for-sale/
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