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Square cannot provide advice on tax issues. This article is for educational purposes and does not constitute legal or tax advice. For specific advice applicable to your business, please contact a professional.
As a business owner it can be hard to plan a week or a month ahead while forecasting much longer-term decisions. If your goal is to sell your business one day, consider planning ahead to best prepare your finances and your business’s finances for the occasion.
A study by the Exit Planning Institute shows that many business owners aren’t currently planning ahead when it comes to transitioning their businesses. Over 80% of surveyed business owners did not have a transition plan in place. While 34% of those surveyed did have a plan in mind, it was not yet communicated or documented.
Determine your reason to sell.
Before you sell your business, consider why you want to sell or plan to sell in the future. Are you planning ahead to retirement? Perhaps you’re considering a career change or a move. Maybe you would like to pass the business to your children. Regardless of your motivations to sell, think about your goal for the sale and your plans after it closes. BizBuySell general manager Curtis Kroeker recommends at least two years of preparation before you put your business on the market.
Clean up your accounting and prepare documents.
Prospective buyers will want a clear view of your financials going back a few years to get a sense of the health of the business. Clear financial records can give prospective buyers an idea of the business’s debt, cash flow, inventory, and more. These documents
Consider having these documents on hand:
- Licenses, deeds, or any other proprietary documents
- Tax filings
- Accounting records, such as profit and loss statements or income statements, balance sheets, and cash flow statements
- A record of the business’s assets and liabilities
- Get a business valuation.
Hiring an expert to conduct a business appraisal is one way to understand the value of your business. A business owner could seek a business appraisal at any time. However, a business owner will commonly seek a valuation for insurance or to sell a business. The Internal Revenue Service (IRS) shares these three common ways a business may be valued:
- Income approach: This method looks at a business’s accounts and projected revenue tomake a risk assessment.
- Market approach: This method compares your business to similar businesses that have sold recently. This approach is often adopted in real estate sales. If you have purchased a home,for example, you might see an estimate of what that house could sell for. This is typically based on the prices of recently sold homes.
- Assets approach: This method subtracts business liabilities from the total value of assets.This is one reason why keeping documents such as a balance sheet on hand can be useful when it comes to a business valuation.
Consider hiring an appraiser to give you a sense of how much money your business might be worth in order to inform your sale price. An appraiser could cost several thousand dollars, so think about how this would fit into your budget when selling your business. An appraisal and well-documented finances will help you determine an asking price for your business.
The Appraisal Foundation suggests the following resources to help value your business:
|Valuation Professional Organizations||Related Professional Organizations||Non-member Standard Setting Organizations||U.S. Government Entities|
|American Institute of CPAs||CFA Institute||The Appraisal Foundation||The Appraisal Subcommittee|
|AICPA Forensic and Valuation Services||The ESOP Association||International Valuation Standards Council||Internal Revenue Service|
|CBV Institute||International Private Equity and Venture Capital||Financial Accounting Standards Board||U.S. Securities and Exchange Commission|
|National Association of Certified Valuators and Analysts||International Accounting Standards Board|
How to put your business on the market
When you’re ready to list your business, it’s important to advertize that your business is for sale. From letting friends, family, and employees know to listing the business for sale on a marketplace, think about how you’ll alert potential buyers that the business is available to buy.
There are many ways to list a business or franchise for sale, so consider working with a professional to explore all possible options. A few ways to go about it include working with a business broker or an investment bank, leveraging online groups or networks, and selling the business on social media or on online listening sites.
Using a business broker
While you can sell your business yourself, for companies with less than $5 million in annual revenue, the National Federation of Independent Business (NFIB) recommends a business broker. Typically the business broker will conduct the business valuation and charge a commission of 5%–10% of the sale price. They may create a prospectus — a printed document that describes an asset to potential investors — and list the business in fitting marketplaces. In addition to leveraging their own networks, a broker may list your business for sale on marketplaces such as BizBuySell or BizQuest. If you work with a business broker, you may not need an appraiser, as they might be able to perform the business valuation.
As you begin to speak with potential buyers, ask questions to understand where they are in their journey to purchase a business. For example, is the buyer just starting their search? Does the buyer have experience in the industry? Is the price of the listed business in line with the budget the buyer has in mind for the purchase? Setting clear and simple expectations will help avoid any confusion for potential buyers. Once you have found a buyer, consider working with a legal professional to finalize any legal documents or contracts you will need to complete the sale.
How to transfer ownership
There are several ways to transfer ownership of your business once you are ready. Here are a few to consider:
- Outright sale: With an outright sale you sell the business, receive payment, and complete the transaction.
- Gradual sale: With a gradual sale of a business, you can draft a flexible payment plan over a predetermined period of time. A gradual sale can be customized to the parties involved.
- Lease agreement: A lease agreement grants temporary ownership of the business, similar to a car lease agreement. Typically, an agreement in this case includes details of conditions and payments in exchange for temporary ownership.
Square sellers can transfer ownership of their account to a new owner by following a few simple steps. You will need tax information and the presence of the existing owner to transfer your Square account. Be sure to look into restrictions for transfer eligibility once you’re ready to transfer ownership of the account.
Plan your exit strategy.
There are several types of exit plans you may want to consider for your business. Plan ahead and consider what might make the best fit for your business. Here are a few exit strategies that businesses employ:
- A merger or acquisition: While this option might seem reserved for at-scale businesses, many small- and medium-sized businesses consider a merger with a competitor. One reason businesses consider a merger or acquisition is if they operate in the same industry or geographic area and want to forces rather than compete for customers and resources.
- Sell the business to a family member: In this scenario you sell the business to a family member, perhaps the next generation of owners. A business owner who has family members already working at the business might consider selling to them as they could be familiar with the business’s operations and finances.
- Sell the business to a partner: Perhaps you formed the business as a partnership and you would like to exit the business, allowing your partner to take over. In this instance you would not need to look for a prospective buyer and may have already signed a buy-sell agreement as a part of the initial partnership. A buy-sell agreement is a legally binding contract that helps ensure the continuity of the business.
- Sell the business to an employee: In this case you might sell your business to current or former employees. This could be an opportunity to transition to a group or individual already familiar with your business and its operations.
- Plan and launch an initial public offering (IPO): An initial public offering means you list shares of your privately owned company on a stock exchange. The general public can then purchase shares of your company. One reason a business may consider going public is to access additional capital. The U.S. Securities and Exchange Commission (SEC) offers guidance for businesses that want to launch an IPO.
Some businesses may contemplate bankruptcy during an exit as a possible exit strategy. In this case consider working with a professional to determine which type of bankruptcy would be most suitable. For example, a business owner might file for bankruptcy to allow a business to continue while reorganizing debts. While this is not a path businesses typically plan for, there are active management tools and strategies available to navigate filing for bankruptcy.
Whether you are just starting to think about selling your business or ready to sell, review some of these ways you could set yourself up for success when it comes to deciding the future state of your business.