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Expert Answers to Biz Questions
Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.
Selling Your Business? Be Sure to Think Through These 4 Factors
For many business owners, there comes a point in time where selling the business is the best option – personally, professionally, and financially. But with so many different factors in play, knowing how to sell a business is anything but straightforward.
4 Things to Consider When Selling a Business
As much as we make it about money, the sale of a business goes much deeper than just dollars and cents. There are numerous other issues at play, and it’s imperative that you go into this process prepared. Be forewarned, the sale of a business can be a long, tough slog, so keep the right frame of mind. As you wrap your mind around what the sale of your business may look like, here are a few some important elements to consider:
- Proper Business Valuation
Let’s begin this discussion with a look at how you can properly value your business in order to attract the right types of buyers and simultaneously maximize your earnings from the sale of the company.
“There are really four business valuation methods (nested within three approaches) that you need to be aware of,” Meredith Turits writes for Fundera. “Each uses a different aspect or variable of a business to calculate its numerical value—either a business’ income, assets, or using market data on similar companies.”
The first calculation is known as the Discounted Cash Flow Method. It looks at the present value of your business’ future cash flow, discounted according to the relative risk involved in purchasing the business. This method is ideal for newer businesses with high growth potential, but minimal (or no) profitability.
The second calculation is the Capitalization of Earnings Method, which looks at the company’s future profitability by accounting for cash flow, annual ROI, and expected value. This method is typically used with established businesses that have stable revenue.
The third calculation is the Asset-Based Method, which takes the net value of a company’s assets and subtracts the value of its liabilities. This is the preferred option for businesses that hold investments in real estate that aren’t yet generating profit.
Finally, there’s the Market-Based Method. This formula calculates a company’s value based on the purchases and sales of comparable businesses in the same industry. This method is a lot like the sale of a piece of real estate that uses comps to come up with a fair price. It’s good for businesses that are in crowded industries with lots of transactional volume.
- Tax Implications
The sale price of a business isn’t the only financial metric that matters. You have to consider the tax implications of such a significant decision. One way to minimize your tax hit is to use a Deferred Sales Trust.
“The Deferred Sales Trust is a legal contract between you and a third-party trust in which you sell real property, personal property or a business to the Deferred Sales Trust created for you,” Reef Point LLC explains. “This is in exchange for the Deferred Sales Trust’s contractual promise to pay you a certain amount over a predetermined future period of time in the form of an installment sale note or promissory note.”
- Legal Protections
The sale of a business – no matter how large or small – is a serious legal matter. Be sure to have all of the right legal protections in place to prevent any future problems that could lead to aggressive legal action. A solid contract that abdicates you of all future responsibilities is necessary.
- Existing Debt
Before selling your business, do a debt study on your business. This will help you uncover all of your debts, figure out the terms, and determine whether it makes sense to go ahead and pay off these debts or to roll them over into the sale of the business. In most cases, prospective buyers find it more attractive if you take care of debt before the sale.
Make a Smart Decision
The sale of a business has far-reaching effects and consequences, financially, legally, personally and emotionally. Your decision will influence your life for years to come. This influence can either be a positive one or a negative one. Weigh all of the considerations, seek guidance from the appropriate people, and utilize the resources you have at your disposal to make an intelligent, forward-thinking decision that sets you up for long-term success.
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