f you’ve spent years — maybe even a lifetime — building a small business and are starting to think about retiring or cashing out, now may be a good time to sell.
The median asking price of businesses for sale grew 12.5 percent in 2015 to $225,000, up from $200,000 in 2014, according to BizBuySell.com, an online marketplace with more than 40,000 business listings for sale. The entities are selling on average for about two to three times their annual cash flow and at 90 percent of the asking price, according to the website.
“A lot of higher-quality businesses are hitting the market as sellers are seeing the success of others in the marketplace,” said Bob House, general manager of BizBuySell.com and BizQuest.com, which together have about 76,000 businesses listed for sale.
Ideally, owners should begin getting their businesses ready to sell at least a couple of years before they hope to close a deal, House said, to slowly wean themselves from the day-to-day responsibilities and getting it in tip-top financial shape.
Think it over, then think it over again
Many sellers make the mistake of not having clear business and personal objectives for once they sell, said James R.F. Berkeley, managing director of the London-based business consultancy Ellice Consulting.
“In family and small businesses you’ll often hear about ‘seller’s remorse,'” he said, noting that sellers haven’t figured out what they’ll do next. They worry about their customers and employees, and wonder if they sold at the right time.
“The ideal time to sell is when there is a peak in market activity, in your own profits and in your market sector. Many sellers hang on for a perfect time that never comes, losing sight that their goal should be a successful, not perfect sale.”
Enlist the help of advisors
Though it is not necessary to hire a business broker, who may charge as much as a 15 percent commission on the sale price of the company, a broker will spend the time vetting buyers, ensuring confidentiality of the process and answering questions so you can focus on making money, House said.
You’ll also want to enlist the help of an accountant to prepare financial paperwork, and a lawyer to help you review offers, contracts and deals.
Get your financials organized
A diligent buyer is going to want up to five years’ worth of profit and loss statements, bank statements, tax returns, leases, supplier and vendor contracts, and customer data, said Barbara Findlay Schenck, a business strategist and author of “Selling Your Business For Dummies.”
Make sure the paperwork looks clean, organized and clear so that it is representative of a well-managed company and so that you do not inadvertently mislead the buyer. “You can’t sell a business with records in a shoebox,” she said.
Transfer assets that won’t be sold
Once you know you’re going to sell, begin transferring assets into your personal name if they will not be sold with the business, such as cars, intellectual property and real estate, so they’re off the expense column of the balance sheet, Schenck said. This will show the buyer a clearer picture of cash flow potential.
Justify the price
“Sellers forget that the value of their firm is the value of the firm to someone else,” Berkeley said. Businesses are often priced as a multiple of either their revenue or cash flow, which varies by industry and size.
The average small business is priced about two times annual cash flow, but as cash flow increases, so does the multiple. Businesses with a cash flow under $100,000 received a sale price of about 1.97 times cash flow. Those showing between $300,000 and $500,000 exhibit a multiple of 2.81, according to BizBuySell.
A premium can be charged for a firm with either a pipeline of business booked in the immediate future, a 25 percent annual sales growth trend, or proven repeat business, Berkeley said.
A savvy buyer is not going to care about cash flow only.
“You want to look at your own company in an objective manner … do you have a salient business strategy?” said Ronald Recardo, managing partner and business strategist at the Catalyst Consulting Group.
“A lot of companies make money in spite of themselves. [Buyers are] going to look for the quality of leadership and whether you are differentiated.” That means presenting the buyer with a plan for how the business could grow and flourish over time.
Work yourself out of the business
If the company looks like it is dependent on you or a few key staff, a buyer may believe the potential for its growth will go away when you do, Schenck said, so take time to ensure it can run without you as its face.