As a small business owner, one of the biggest decisions that you may ever have to make is the decision to sell your company. You need to concern yourself with how, to whom, and where you are going to sell your business.
Ways to Go
There are two ways in which you can sell your business. You can either hire a broker to sell it for you, or you can try to sell it yourself. The easiest way to go would be to hire a broker because they will take a lot of the stress off your shoulders. They will take care of creating the sales listing and advertising it on the internet and through their various brokerage networks. This will expose your sales listing to a plethora of potential buyers who are likely qualified to purchase your company.
Going the FSBO Route vs Hiring a Broker
Once the buyers see your listing and send a request for more information, your broker will be the one to address their concerns and answer their questions. You won’t have to worry about any of that. Instead, you can continue focusing on running your business and keeping it a success as your broker works hard to sell it for you. Of course, you can expect to pay a commission to your broker if they successfully sell your business. The average commission rate is 10% of the final sales price for the business. Brokers may add other fees, so make sure you are aware of all the services that your broker charges before you sign an agreement with them.
If you do not like the idea of paying a commission percentage and additional fees to a broker, then you can always take the more cost-effective option by trying to sell the business yourself. This means you would be handling all aspects of the sales process on your own. As you can imagine, the hardest part about doing this is finding the time to communicate with buyers and answer their questions. However, if you have managers and workers who can keep your business running smoothly while you worry about selling it, then this will be a huge advantage for you.
About 10 to 15 years ago, it was rather difficult for a business owner to sell their business all by themselves. But now, there are DIY platforms like ExitAdviser which have simplified the process for managing all the tasks of a business sale. You can create a sales memorandum, calculate an estimated value of your business, create an ad, and publish your ad in the marketplace. This covers most of the tasks for selling your business in the first place. If you tried to hire a business broker, then they likely wouldn’t devote as much time and energy to your sales listing in this way.
Business brokers usually like to take on bigger accounts which are worth more than one million dollars because selling a business this big would earn them a greater commission. So, if your business is being sold for well under one million dollars, then a business broker is not going to do a good enough job of selling it. They may just publish your sales listing by using a premade template. The most they will do is communicate with a couple of prospective buyers, but that is all. On the off chance that your business happens to sell with a broker, would you really want to pay them 10% commission for making such little effort? Any small business owner would benefit more from going by a DIY route and selling their business themselves.
Selling Ownership vs. Selling Assets
There are two types of business sales that you can conduct; an assets sale and an ownership sale. An assets sale is when you are only selling the assets of your business and not any ownership interests. This means you would only be selling the intangible and tangible assets of your business. Intangible assets would be your brand name, trademark, copyrights, as well as the list of your customers and contracts. Tangible assets would be your equipment, inventory, building, and land.
In an ownership sale, also known as an entity sale, you would be selling your ownership (membership) interests and all the company’s assets too. If your company has stock, then your buyer will be purchasing all your shares of ownership so that they can gain control of the business. Otherwise, if you own a private small business, then you just transfer the membership of the business entity into the buyer’s name.
The way in which you sell your business will depend on the type of business entity you have and where the value of your business is located. For example, asset sales are appropriate if you are running a sole proprietorship because there is no actual business entity that is separate from yourself. The only value in sole proprietorships comes from its assets and nothing else.
For all other business entities, such as a partnership, limited liability company, and corporation, it could be either an ownership sale or an assets sale. The seller may not always want to set a specific sale type right away. They may wait to discuss it with a potential buyer and see which one they would prefer to do.
In most cases, buyers will want ownership interest if the business is making a profit and they can step in to take over running it. However, if the business is losing money, then most buyers may just want to purchase its assets without inheriting the ownership obligations and debts of your business. So, it all depends on how successful your business has been over the last few years and in the present. Be prepared to present your financials to prospective buyers.
Who am I Selling To?
You can either sell your business to a third-party buyer or someone within your organization or network. If you list your business for sale in the open marketplace, there will be potential buyers looking at your sales listing. Those buyers who are interested will be asking you questions and requesting more information about your business. On the other hand, you may want to consider selling your business to an employee or stakeholder of your business. That way, you give them a chance to keep their job and you will be selling your company to someone who is already familiar with how your organization operates.
Sometimes selling to a competitor will be an effective option because they may purchase your business to expand their own operation which is like yours. If you can’t find third-party buyers or employees to sell your business to, contact your competitors and see if they are interested in purchasing it. Finally, you could just sell your business to a family member that you trust enough to run it well. You could even offer them seller financing to get the deal going faster.
Let's discuss these options one by one.
Selling it on a Public Marketplace
Selling your business in the public marketplace means posting up sales listings on websites which specialize in publishing "business-for-sale" listings. Some of the top online business-for-sale platform include ExitAdviser.com (a complete DIY selling platform), BusinessesforSale.com and BizBuySell.com. If you own a physical, "brick and mortar" type of business, then you should try listing on one of these websites. For those who just have an online business, there are other platforms like Flippa.com which are appropriate for these types of listings. They specialize in website-for-sale listings which include e-commerce websites too.
Regardless of which website you decide to list on, be aware that they are not brokers or sales agents. They are just selling platforms that will help bring relevant traffic to the sales listing of your business. However, it will still be your responsibility to communicate with potential buyers and answer their questions. Some of these websites will offer you additional tools to help you throughout the sales process, such as legal templates and forms for the various contractual paperwork that you will be dealing with. In some cases, you can pay extra to receive advisory services for your listing and the sale.
Ultimately, you will still be in charge of orchestrating the sale of your business. If you are new to the selling process and you want the most assistance possible while still doing it yourself, then you will need an end-to-end selling platform like ExitAdviser to assist you. This platform will expose your sales listing to a marketplace with a lot of traffic from people who are looking for businesses to purchase. You will also have professional online tools which will assist you in every step of the sales process.
It is not recommended that you take the cheaper route and just post your sales listing on free directory websites. Craigslist, for example, is not the type of website where you can expect to find a serious buyer for a business. The only serious buyers go to websites which specialize in the business-for-sale niche. So, it is best to go to a business-for-sale platform and pay for the services provided and for the placement of your sales listing. You will get better results that way.
Selling to Employees
Selling your business to employees will save you the time and money from creating and advertising a sales listing. With employees, there is no waiting and wondering whether you will find a buyer or not. You can just go right to your employees and offer the company for sale to them. Since they are already personally invested in the company, they may want to consider purchasing your business through either an Employee Stock Ownership Plan or a Management Buyout. You get to decide which one you want to use. They each have their advantages and disadvantages, so your decision should be based on how many employees you have and the overall size of your company.
An Employee Stock Ownership Plan is when the company’s employees get the unique opportunity to purchase your shares of the stock so that they can get ownership of the business. Sometimes this plan is set up like a retirement plan where employees earn stock as a bonus each year they stay with the company. But when it comes time to sell the company, you can just sell all the remaining shares to them that you currently own. Of course, they are likely not going to have the money to purchase all these shares. However, the Employee Stock Ownership Plan will make them eligible to apply for a commercial loan to purchase your shares. They will likely get approved for the loan because the lender will use your company’s stock as the collateral for the loan.
The management buyout is when ownership of the company is sold to its key managers. If you have a private company and you want to sell it to your employees, then this is the option that you will have to go with. They would not be purchasing shares of stock in the company to gain ownership. Instead, they would be purchasing the company directly from you. In most cases, they will not be able to take out a commercial loan for this purchase. They will have to likely get a private loan to afford the purchase price of the company. Either that or you could offer them a seller financing deal (see below) where they make monthly payments to you.
Selling to a Competitor
Your company may have some competitors. There are near competitors, direct competitors, and indirect competitors. Near competitors are targeting a different area of your industry’s market, while direct competitors go after the same market as you. Indirect competitors fall in the middle by only utilizing a small portion of the same market. When you want to sell your business to a competitor, the type of competitor that you choose to sell to will depend on certain factors about your business.
What you must understand is that direct and indirect competitors are out to hurt your business because they are targeting the same market. That is why a lot of business owners will sell to near competitors because they are in a different market and are not trying to hurt their business. However, it may not always be a good idea to sell to near competitors, especially if your business has a lot of loyal customers. Direct and indirect competitors will find a lot of value in those loyal customers. This means that if they purchase your business, they will be inheriting those loyal customers for their business. As a result, these direct and indirect competitors may be willing to pay a higher price to obtain ownership of your business.
Just be careful about disclosing your company’s confidential information to a competitor during the sales process. You don’t want them to take your information and profit from it without completing the purchase of your company. Get your confidentiality agreements in proper order to prevent them from doing this.
Selling to a Family Member
Selling or transferring your business to a family member will be the easiest way to get out of your company. However, you need to be sure that your family member will be able to handle running your business. Don’t just transfer your business over to your son or daughter because of some family obligation that you feel is necessary to fulfill. Like with a third-party buyer, you need to be sure that your family member can run the company successfully and keep it profitable.
If your business is currently not profitable, then giving the company away to your family member as a gift might be a better option than selling it to them. That way, you can take advantage of the tax benefits associated with gifts because the givers don’t have to pay any taxes until the value of their total gifts given has reached $5.45 million. Since you likely have a small private business, the value of this business is going to be less than $5.45 million. Therefore, giving your business away as a gift to a family member will mean no taxes for you to pay.
More than likely, you will be seller financing the business to your family member which means they are going to be making monthly payments to you in exchange for ownership. A lot of business owners sell to their family members because they want to retire and receive a nice passive income that they can survive on for the rest of their lives. If you don’t want to worry at all about running the company anymore, then make sure you conduct a full sale of your business to your family member.
If you still want to retain partial control of the company, then you need to conduct a partial sale instead. This will allow you to keep the assets and a small portion of the profits while the new owner runs the business. Then you can make a monthly income off the profits and from leasing the physical establishment of the business to your family member.
Keep reading – Part 2