How to Sell Your Business, page 2

Planning a Sale

The successful sale usually begins long before the actual sales process starts. In order to successfully sell a business, the business owner must at the least:

1. Make a commitment to the sales process;

2. Understand his own goals and priorities in selling the business;

3. Accomplish some advance preparation (such as getting financial statements and paper trails in order).

Actually, the more planning, the greater the likelihood is of an advantageous sale. So it is to be hoped that the seller does a great deal more than these minimal steps, as outlined in this article.

Reasons for selling

You’ve worked hard, made sacrifices, made good business decisions, applied your creativity, assembled a good team—and your business is working. Why sell now? While there are, of course, some legitimate reasons, which I’ll discuss shortly, it is extremely important to understand that if a business is not “working,” it is not a good above-board candidate for sale.

What do I mean by a business "working?" In the conventional small business context, this means that the business reliably generates sufficient free cash flow to pay its bills, service its debt, and pay its owner/operator a fair salary. In addition, there should be a reasonable prospect for growing the business.

For larger businesses, the specific metrics of success are somewhat different—but they also focus on generating cash flow (often measured as EBIDTA, or earnings before interest, depreciation, taxes, and amortization).

A possible exception to this emphasis on profitable may apply to technology businesses, where the utility of the technology itself the main thing being sold. In other words, technology businesses without positive cash flow may still be salable (see further discussion in Valuing Technology later in this article).

People are people, and entrepreneurs are particularly optimistic people. This being the case, a likely prospect of future cash flow can sometimes be thought to substitute for current income—particularly with technology businesses—implying that the business is working. Of course, from a buyer’s viewpoint, this is a riskier proposition, and must be scrutinized carefully.

As the owner of the business you are considering selling, you are in the best position to understand whether your business is working (and likely to be a good candidate for a sale). More than two-thirds of the small businesses listed for sale every year do not sell. Presumably, the bulk of these unsold businesses were not working—or were priced too high.

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