How to Sell Your Business for Top Dollar
The total number of businesses that were sold in the second quarter did dip as compared to the year before. The report says that 1,603 business sales closed in the second quarter, a 1.6% drop from the same quarter last year.
"This is a characteristic of the recovery we're in. It's a very slow and bumpy recovery. It's still a challenging market to buy or sell a business," says Mike Handelsman, BizBuySell's group general manager.
Another trend that has become more prevalent is a strategy known as seller financing.
Five years ago, if you wanted to exit a business and retire to Florida, you could do so with all cash. Now owners will be lucky to get half the money up front and hope the business will be run well under the new owners in order to get the other half of the money in five years, for example.
Banks are "only lending to the absolute cream of the crop," Murphy says. "They are very difficult to get. They require better credit, knowing the buyer better, more money down and usually seller financing."
That's why experts agree that the first thing sellers need to do is to prepare at least two to three years in advance of a sale.
"You want to sell a business when it's doing well, you don't want to sell it when it's going down the drain," Murphy says.
That means having a tight handle on your financial situation and clear and documented business processes. The less documented these measures are, the less confident a buyer will be in your business, which will lower the sale price.
Financial records should show maximum profit. The higher the profit, the higher the price. So if you're thinking of putting a portion of profit into a life insurance policy or paying for a car through the business, hold off on that.
"Get rid of all that stuff and clean up books and records," Murphy says. Certainly don't spend money on unnecessary items or perks, but even things like sponsoring the local little league team or donations to charity, when preparing to sell keep it to a minimum, if at all, so that you can prop up profit, he says.
The business also won't get many offers if the model is so dependent on the owner, a key customer or supplier that it can't be detached from it.
Businesses that tend to be more appealing to buyers in this market also have a higher level of tangible assets. As a result, they are easier to get loans for because there is more collateral, such as real estate or equipment.
"Sellers are often enamored with their own business," Handelsman says. "What's often most surprising is they think their business is worth more than it really is."