Five Smart Steps to Selling a Business

Five Smart Steps to Selling a Business

By Bill Mueller

Thinking of selling your practice, either now or someday in the future? Take care to do it right; there's a lot at stake! Your business represents years of work and attained wealth. As a business owner, you surely can encounter many problems finding buyers, screening buyers, keeping details confidential, maintaining control and avoiding surprises during due diligence. But before you worry about your buyers and the deal, worry first about preparation. Here are five smart steps in particular for you to consider:

1. Form—and Use—An Advisor Team

Selling a business is not the time to be penny–wise and pound–foolish. Pay for advice before speaking with any buyers. Your advisors are experienced in making a deal and can help you focus on the important things while avoiding the deadly pitfalls. Buyers will sense if they are dealing with a do–it–yourselfer and this will cause them to shy away.

Attorneys, for example, can protect your confidentiality and investigate legal records to see whether a buyer is legitimate or just a "tire–kicker." You the seller also want to be sure that a potential buyer is not, in fact, a competitor sneaking around in hopes of acquiring free business tips. And, of course, your attorney can help you write up any deal you negotiate.

Your CPA will help as well, by preparing your financials to be used in deal–making. Tax returns are not enough. The IRS will want a piece of the deal and your CPA will work on your behalf to minimize your taxes.

Finally, you'll need a coach, i.e., an experienced dealmaker—someone who knows about pace, process, details and interpersonal snags. A good coach will show you how to communicate with buyers, when and how to reveal data, how to protect secrets, how to stay on track and when to give up on one buyer and start looking for another.

A team of experienced advisors can keep a deal moving and overcome deal–delaying inexperience on either side. They'll take the emotion out of selling, which helps to actually complete a good deal.

2. Have a Compelling Reason to Sell

A big obstacle for business owners is knowing exactly why they want to sell. This reason must be heartfelt. You shouldn't "shop" your business around, hoping for a good deal. Similarly, talking to potential buyers just to see "what it's worth," can damage your practice's reputation and its relationships.

Some reasons for selling are easy to explain: death, divorce, disease and disability. But if the reason to sell is "burnout," the buyer will want to take care that he won't burn out for the same reasons! If the seller's reason is that "cash is needed" for other investments, don't be opaque or overly private or secretive about those investments. If golf in Florida is your reason for selling, let the buyer see that golf is your passion and not just a pastime—or a smoke screen.

If your prospective buyer feels that you don't have a compelling reason to sell, he will start looking for other hidden factorsand likely balk at spending lots of time, energy and money investigating a deal that could suddenly be cancelled should you, the owner, change your mind at the last minute.

3. Do the Numbers

A deal to sell your practice is more than the "numbers." A seller's numbers should calculate taxes, recast financials and estimate the business's value to the buyer.

The IRS is the silent third party at any table. A seller must anticipate taxes and his cash received for each of several deal possibilities. A seller's question should be, "How much will I keep?" not merely "How much will they pay?"

For financials, your CPA and coach can help recast numbers, as a buyer would do. If done before actually meeting a buyer, you'll understand whether a buyer can earn enough to service his debt and the price.

The numbers might also need a formal appraisal, useful in convincing buyers about the price and in helping the buyer convince his bank. Sometimes, it's also useful in helping the owner understand what's a realistic price for his business and why.

4. Prepare a Good Story

A big obstacle to an effective sale of a business is a seller's "poor story," i.e., too many unanswered questions. If the buyer asks reasonable questions, the seller should not respond with any of the following:

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• "Let me get back to you."
• "Why do you want to see that information?"
• "I don't have that ready."
• "You don't need that."
• "Those are private documents. I can't let you see them."

When you respond in these ways, your buyer will sense hesitation—and assume problems. A good advisor will help you anticipate such questions which almost any buyer likely will ask.

What a buyer expects is a "good story" from you that shows how your practice will be profitable. A prospectus should answer most of his questions, leaving the buyer only to conduct phone calls, meetings and/or other research to verify your story. With a complete and well–documented prospectus, a buyer will more than likely decide to make a deal quickly.

Financials should be recast to match the story, so that a buyer can use them when preparing his loan applications. The buyer and his bank will want to know how much money will be available to pay down loans, pay the buyer and pay for needed equipment. He'll need a type of accounting that is somewhat different from tax accounting, i.e., "management accounting." This will demonstrate variable costs, overhead costs, incremental revenue and costs, break–even point and capital renewal spending.

Your buyer will also want to know that the business's marketing and customer relations are solid. He or she will want to see written marketing, operating and financial plans including processes showing that all problems are manageable. A buyer needs a story that will let the banker relax, confident that this buyer holds a firm grasp on the business.

So make it easy and safe for your buyer to actually purchase your business. Provide a good story in the form of a well–prepared prospectus anticipating a buyer's questions and issues. This will help speed the deal, while maintaining confidentiality.

5. Keep the Business Running

One of the greatest obstacles facing sellers is the hubbub of selling. It's a once–in–a–lifetime event that can distract any owner. And without the owner's full attention, a business will degrade, losing both momentum and value.

Certainly, a seller must spend some energy on a deal. But with good advisors, a solid vision and solid preparation, you can keep your business running at a healthy clip while soliciting buyers to come forward and to offer and then make a deal. The pending end of your ownership shouldn't cause your business to lose any value or steam whatsoever.

With a prospectus, documentation and a story in hand, it should be both manageable and predictable to market and sell your firm. You will now know why someone would want to buy your business and who that someone should be. With both a story and a good advisor team in hand, you'll likely obtain a fair price while maintaining the value of your practice and controlling potential turmoil in the selling process.