Seven Things You Need to Know About Selling Your Business

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1. Alternatives to Selling

The IPO

If you business is large enough, you can consider an initial public offering (IPO) in which you will sell your company’s shares publicly on the open market. This can be a good alternative to selling the business, but IPO’s require the outlay of large sums of money that may be out of reach for your company. If you have money available to finance an IPO, research the IPOs of similar-size companies in your field and look at their track record and whether they experienced accelerated growth.

An IPO for your company will mean that you will lose a significant amount of control. You will be face outside investors, strict Securities and Exchange Commission regulations and record-keeping rules. Your company information will become a matter of public record.

Selling Corporate Assets

Sometimes it becomes difficult to cut back or restructure your business into a smaller business by selling some of your corporate assets, but this may be the best alternative to selling the business outright. If you consider selling off part of your business, hire an outside financial advisor to appraise your assets and determine a fair market price for the assets you are considering selling. Choose assets that are not directly tied to your core business. Choose assets for which there is a strong market. Obtain input from legal and accounting experts.

2. Ways to Determine The Value of Your Business

If you decide that you must sell your business, there are a number of ways to value your company and determine your selling price.

Informal and formal appraisals

Find out the selling prices of similar businesses in your area and compare their companies to yours. You can also contact the national trade association for your industry. You can also hire a professional business appraiser. This method is the most credible and your potential buyers will be more likely to accept the formal appraisal.

Market-based valuation

One commonly used method of valuation is based upon past experiences selling of similar businesses. A business broker may recommend an asking price based on the sale prices of similar businesses in your area and industry. This is similar to find comparable sales for residential real estate, and it is the least expensive. It is commonly used for the sale of small businesses.

Asset-based valuation

Your business assets may be considered at book value to determine the liquidation value of the business. The result is a fire-sale price that will be the bare minimums value.

Earnings-based valuation

Your company’s historical financial results will be considered and future income projections will be calculated and multiplied times a “Cap Rate,” the interest rate usually earned in the market.

Price Building

Price building is a valuation method that looks at the assets, leases, real estate, and goodwill of the business. It considers the value of the tangible assets on the balance sheet and the valuable intangibles that create the company’s value in determining the amount a buyer would be expected to pay for the business. The intangibles include location, unique product or service, profitability, favorable lease, goodwill, and good employees. The tangible assets will be real estate, equipment, and inventory.

After you inventory the tangible assets and calculate their value, you will estimate a value for the intangible assets. The rule of thumb for valuing these intangibles is that their combined value should be approximately one year’s net income. Add together the value for the tangible assets, the intangible assets, the agent’s commission, and other costs of sale to calculate your asking price.

Return on investment (ROI)

Consider your annual business net profit to calculate the buyer’s return on investment. Divide your net profit by the buyer’s original cash investment, and the result is the return on investment. The typical ROI is 12 to 25 percent. The higher the ROI, the higher the sales price is likely to be.

3. Prepare Your Business for Sale

Prepare in advance

The best results come from an owner who starts preparing his or her business for sale at least one year in advance. The owner should carefully review the financial statements and have a cleare understanding of the company’s revenue and growth potential.

Prepare company records and contracts

All company records must be entered to clearly document all company transactions so that potential buyers can review and evaluate the company’s financial status. Examine all supplier and customer contracts to be sure that their terms and conditions will not require renegotiation by the new owner and to be sure that they are financially good for the company. Review your real estate leases to find out if they require renegotiation upon sale. Analyze the equipment leases and other material contracts from the buyer’s perspective.

Write a policies and procedures manual and consider employees

Create a procedures manual that documents the best way to run the business and deal with its employees. Remember the importance of keeping key employees during a sale and whether they will be crucial to the new owner’s success. If they are, the new owner will want to know which employees will stay with the company after the sale. Have a company meeting to explain to employees that your are selling the business and tell them what effect the sale will have on their jobs.

Evaluate and update company assets

Do a complete inventory or all assets, equipment, and inventory. If your computer systems are obsolete, upgrading the system will make it easier to sell your business. If company assets include real estate, decide whether you should or sell the real estate before the company is listed for sale.

4. Legal Consequences of Selling a Business

Disclosure

You must make a complete disclosure to the buyer about all aspects of the business.

Open up the books for inspection. Show them all leases and other relevant contracts. Do not withhold any information from a potential buyer. Your failure to disclose material information could be considered fraud.

Will the Bulk Sales Law Apply to your business?

“Bulk sales” laws were enacted to prevent business owners from defrauding creditors by transferring their assets to another individual or entity to keep their assets away from creditors. When one corporation receives the assets of another company, it is expected to assume its debts and accountable for the debts. If, however, one business transfers all of its assets to another business, but the receiving business does not assume all of the debts, you must consult an attorney to be sure you comply with the law.

5. Collect Outstanding Accounts Receivable

Create an aggressive collections plan

You should make collections a top priority and devise a systematic method for collections. Put your collections plan in writing and share it with the employees who are part of the collections team. Make sure everyone consistently carries out the plan. Contact your past-due account holders by email to remind them that their account is overdue. Tell them how many days they are late and the precise amount that they owe.Ask recipients to acknowledge your e-mail. If you do not receive a response on your first e-mail, send another email advising them that you will contact your attorney.

Hire a collections agency or attorney

Hiring a collections agency as a last resort may be the only way to recover your money. When you create your aggressive collections plan, collect some names of reputable firms and make some initial inquiries to know what to expect. Their fees will be between 25 and 40 percent of the amounts collected. If you have very large overdue accounts, you may want to hire a collections attorney with experiece in collecting outstanding accounts receivable.

6. Define your priorities

Sales price and terms

Decide exactly what you want from the sale. Do you have to have an all-cash deal or can you finance part of the sale price? Is it important to you that the buyer continue your business traditions? Decide on the minimum price that you will take. Do you have to have a lump sum at closing or can you accept payments over time?

Time your decision to sell

When the national economy is strong and your business is having its best year, you will receive the highest dollar value for your business. keep an eye on what the national economy is doing and be flexible about when you will sell. Sell early if you can avoid being caught up in a bad economic cycle.

Prepare to sell

The average time for a businesses to sell is approximately one year. Start planning two years in advance of the date you want to sell. Also, prepare your business for the sale by cleaning, painting, and doing whatever you can do to make your business premises more attractive. Keep your clean and attractive every day, because you never know when a potential buyer will drive by.

Get professional help

Do not make the mistake of thinking that you can sell your business without help from professionals. In the course of the sale, there are numerous federal, state, local, and tax issues to consider. Use your time wisely and spend your time running your business successfully to increase its sales appeal. Ask for help from your accountant; lawyer; business broker; and business appraiser.

7. Consider the tax consequences

How income is taxed

If you owned your business for at least one year, the increased value of your business will be taxed as a long-term capital gain at approximately 20 percent. If you owned your business for less than one year, the increased value will be taxed as personal income at more than 30 percent. When you sell the company’s assets, they are classified as capital assets and will be taxed as long-term capital gain or ordinary income. When you sell inventory, the proceeds will be classified and taxed as ordinary income or loss.

As you prepare your business for sale, you should make succession-management plans. Prepare the firm’s next generation of leadership to include capable managers. The absence of a succession strategy is considered to be a company weakness. The lack of a practical succession plan can complicate a potential IPO, discourage a buyout, and be less desirable for underwriters or institutional investors.

Jo Ann Joy, Esq., MBA, CEO

The future of your business starts here!

You may contact Jo Ann by phone at (602) 663-7007, by fax at (602) 324-7582, by email at [email protected] Business Solutions.net, and by mail at 2313 East Ocotillo Rd., Phoenix, AZ 85016. I have many published articles, and I will send any article to you free of charge. Most consultations are free.

For information about other important legal, tax, and business topics, free copies of articles, or EBooks, please visit our website at http://www.IndigoBusinessSolutions.net Copyright 2006. All rights reserved. Indigo Business Solutions is a registered trade name.

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Source by Jo Ann Joy