Selling Your Business For Dummies
Whatever reason you have for selling your business — finances, family, fatigue — you'll want to assemble the right group of professionals to assist you through the sale process, know which essential documents to have on hand, and understand how to value your business assets to ensure a successful sale.
Selling Your Business: Major Documents to Have On-Hand
Sooner or later in the business sale process you'll need the following materials. Use this checklist to assemble everything as soon as possible to smooth the road ahead.
Federal tax returns for the past three years (corporate or Schedule C)
Income statements for YTD and the past three years
Balance sheets for the past three years
Statement of seller's discretionary earnings for most recently completed year
Financial ratios and trends
Accounts receivable aging list
Accounts payable list
Inventory list including value
Current building lease
Franchise agreement, if applicable
Fixtures, furnishings, and equipment list including fair market values
Asset depreciation schedule from most recent tax return
Current copies of equipment and facility maintenance agreements
Current employee, customer, vendor, and distributor contracts or agreements
Current business licenses, certifications, and registrations
Copies of patents and trademark registrations, if any
Copies of outstanding loan agreements
List of existing liens
Product or service price list
Employee records showing staff, hire dates, salaries, pension records, employee benefit plan outline
Business formation documents
Current client list
Current list of major suppliers and distributors
Employment policy manual
Business procedures manual
Photos of business building, work areas, and equipment
Knowing Who's Who on the Business Sale Team
Making the decision about who to bring onto your business sale team isn't clear-cut. One thing is certain, though: Selling your business isn't a time for flying solo. You need to bring aboard some professionals to assist you — from accountants to attorneys to business sale brokers to appraisers. The following list shows which professional resources are available:
Accountant. This is probably the first business sale team member you'll recruit. The financial condition of your business, and the way your financial story is presented, is fundamental to sale success.
Your accountant will have all the information at hand to help you prepare the numbers you need to plan your sale offering and present your business to buyers. If you've worked with an accountant over the years, be sure that person has experience in business sale transactions and the resulting tax implications. Your accountant will likely participate on your sale team at his or her regular hourly rate.
Attorney. If you already work with an attorney to advise you on issues regarding your business structure, employees, contracts, and other legal matters, you probably want to involve that person on your sale team, maybe from the onset but certainly as you reach the negotiation stage and closing point.
Your attorney can help you with preparation of legal documents such as confidentiality agreements, seller disclosure statements, and, of course, the purchase and sale agreement that will finalize the sale. It's especially important to bring an attorney with business sale-transaction experience on board if you're trying to handle the sale on your own without a broker. You'll pay either hourly rates or a flat fee.
Business broker. Some business owners handle their sales with only the help of an accountant and an attorney. Others use a sale intermediary, most often a business broker, but sometimes a mergers and acquisitions (M&A) specialist if the business is large and the deal is complex. The decision of whether to hire a broker weighs heavy on most sellers' minds, and no one answer prevails. Some sellers will tell you their sales went through just fine without a broker, and others will say the broker was essential to their sale success.
In a nutshell, a broker can help maintain confidentiality about your sale, find and deal with prospective buyers, and free you from the demands of selling your business while also trying to run it. A broker can also provide advice on how to value your business. In return, you'll pay a fee, which is usually about 10 percent of your sale price.
Appraiser or valuation expert. If you need a formal appraisal — because of the size or complexity of your business, because you need to prove the validity of business value to the buyer or to the IRS, or because you doubt the accuracy of the value established by your broker or by your sale advisors — you can hire a professional appraiser.
Appraiser fees can range from several hundred dollars to tens of thousands of dollars, depending on the complexity of your business and whether you want an oral appraisal or a formal, written document. Numbers between $2,500 and $5,000 seem to be most common for small business written appraisals, but most appraisers charge by the hour, and the final fee depends on how much time goes into the effort.
Before obtaining an appraisal, talk with your broker if you're using one. Also talk with your accountant. It may well be that between these two resources, you can arrive at a good figure from which to start seller negotiations.
No one, no matter how small the deal, should sell a business without obtaining financial and tax advice. At the very least, you want an accountant to help you assemble and present your business financial records and to help structure your sale with the intent of managing taxes and facilitating buyer decisions. You may also want to involve an attorney, particularly if your business has established a relationship with a lawyer whom you trust to deliver good business and legal advice, or if you plan to sell your business on your own without a broker's help.
Selling Your Business: What Are Tangible and Intangible Assets?
Getting ready to sell your business? You'll need to separate your tangible and intangible assets because at sale time (or in the sale contract), the Internal Revenue Service requires you to break down the price into asset categories, which are taxed at varying rates.
To value your business assets, you create an inventory of all the assets of your business and assign a value to each based on what it would cost to create or replace that asset in similar condition.
Tangible assets include business furnishings, fixtures, equipment, leasehold improvements, inventory, real estate, automobiles, and other major physical assets.
Tangible assets are probably the easiest part of your business to value, because by their very definition, tangible assets are ones you can see and touch. You can often even find comparable items on the market (through eBay and other online shopping sites, through equipment distributors, and through other used-equipment outlets) to help you determine current market values. When valuing your tangible assets, also talk with your accountant, who can help you figure the depreciated value of items you've held for multiple years.
In businesses with well-known names, products, and reputations, up to half the business sale price often covers the purchase of intangible assets — things buyers can't hold in their hands.
Intangible assets fall into two general categories:
Intellectual property rights assets, including trademarks, patents, licensing agreements, and trade secrets.
Other intangible assets, including business name and reputation, processes, strategies, and general know-how, which together contribute to business value over and above the value of tangible assets. These intangible assets compose what's called the goodwill of your business.
Goodwill assets include
Your business name and brand identity
A trained workforce
Strong and durable supplier and distribution networks
Phone numbers and websites
Proprietary technology, systems, and processes
Brand equity, which is the value of the competitive advantage of your name and reputation in the minds of consumers and business and industry partners.