Selling your small business requires thoughtful planning. Whether you’re retiring or considering another business venture, making sure you’re getting what your business is worth in a sale is part of doing your due diligence as an entrepreneur.
Sometimes it can be difficult for entrepreneurs to evaluate their company on their own to determine what is it worth, as well as figuring out all the steps they need to take in order to prepare their business for sale. From valuing your business and making sure any debt and other financials have been taken care of to the best of your ability to pre-qualifying potential buyers, there are a lot of considerations to make before you put your business up for sale.
While most small business owners hire a business broker to help them with selling their business, the information in this post will help you understand the basic process.
Determine your Business’s Value
Determining the value of your small business can be tricky, especially since there are many different factors that affect its value.
In order to get a complete picture of what your company is worth, you’ll need to calculate all the company’s assets, liabilities, recent earnings, and its future earning potential. A list of company assets is just one piece of the information you need to include in a Purchase of Business Agreement.
Assets can usually be broken up into two different types: tangible assets and intangible assets.
Tangible assets are physical items, such as cash, computers, equipment, inventory, and vehicles.
Intangible assets include patents, trademarks, intellectual property, brand recognition, and reputation.
How do I value intangible assets?
Intangible assets can be valued by considering their usefulness over time. The “useful life” of an intangible asset refers to how much value it currently has, and how that value can change over time, such as through patent or trademark expirations, obsolescence, and other factors. The value of intangible assets is usually calculated through a process called amortization.
One common way that businesses amortize intangible assets is by using the straight-line method. The straight-line method is essentially a simple calculation that assigns a monetary value to the intangible asset by considering its initial value (monetary worth based on money invested) versus its residual value (monetary worth over time).
For instance, let’s say a company developed software to manage its internal projects, and development of the software cost $5,000. The $5,000 would be the software’s initial value. However, the company anticipates that the software won’t likely be able to fulfill the company’s project management needs in about two years. After the two years, the software will be obsolete, so its residual value is zero.
In this case, the calculation would be the initial value ($5,000) minus the residual value ($0), divided by the two-year usefulness period, which equals $2,500. Therefore, the company would report $2,500 USD as the amortized value of the software.
Take Care of your Company’s Finances
Unclear company financials can cause unnecessary delays when selling your business. The more convoluted your business’s financial statements are, the longer it takes for a potential buyer to come to a final decision.
One option is to hire an accountant (if you don’t have one already) and get them to help you organize your business’s recent earnings, debts, tax documents, and more for you.
If you’ve kept immaculate financial records for your business, you might be able to show these documents to your buyer (as opposed to having your accountant send your financial information for you) to prove that you’ve done your due diligence.
Whatever you decide, anyone interested in purchasing your business will expect full transparency, so it’s important that you’re able to provide your company’s complete financial picture to a potential buyer.
Pre-Qualify Potential Buyers
Before you get excited by an offer, it’s important that you make sure a potential buyer can actually afford to purchase your business. It may sound obvious, but the majority of small business purchases are financed through a third-party, such as a bank, so if a buyer can’t secure financing, the deal you made with them will most likely fall through.
Buyers can usually get pre-qualified for a loan through a bank or other lender, and if they are interested, buyers will usually send a document like a Letter of Intent to let you know that they are serious about buying your business.
Selling your Small Business
Selling your business is a huge step for any entrepreneur. There are many moving parts in a small business transaction that a seller has to pay attention to, so it’s important that you’re familiar with the basic process before you get started.