When a business owner considers selling their company, one of the things they are concerned with is how to sell their business for the highest price. They need guidance about the selling process, including how to get all records and operations ready to make it more attractive to buyers.
Many factors go into how much a business will sell for. Based on our years of experience selling companies, we provide you with some insights into how to sell your business for the highest price.
1. Prepare Your Business for Sale
The first crucial step you need to take to maximize business sale value is to prepare its finances and verify its legal standing.
Review Your Financial Information
Before you know how much your business might sell for, it’s necessary to look at your company’s financial picture. You will need to review, at a minimum, the last three years of tax returns and a current year-to-date profit and loss statement of the business. These play a role in determining how much your business is worth. We generally recommend listing your business for its full worth, unless you want to sell your business faster. Most tax returns should also be completed to minimize taxes.
Buyers will want to understand the true owner’s income of the business. This is sometimes referred to as Seller’s Discretionary Cash Flow or Net Cash Flow. In addition to profit and the owner’s salary, cash flow also includes the perks and benefits that the owner gets from the business, such as:
Company car
Health insurance
Retirement plan
It also contains some discretionary expenses that may not be necessary for the business. These types of expenses include optional travel and entertainment, country club memberships and other perks for the owner and their family.
To sell your business at the highest price, you need to show potential buyers all the details that make up the owner’s discretionary cash flow. If buyers see that your business makes good profits, they will be more willing to pay a higher price because they believe it’s a smart investment.
Ensure Legal Compliance
A legally compliant business builds buyer confidence and can prevent legal issues that could arise during the sale. Here are a few steps to ensure compliance:
Review business structure: Verify that your business is properly registered with the appropriate government authorities and that all necessary licenses and permits are current. Ensure compliance with local, state and federal regulations relevant to your industry.
Organize legal documents: Collect and review important legal documents, including business formation documents, contracts with suppliers, and lease agreements for any property or equipment.
Resolve disputes: Identify and resolve any ongoing legal disputes or litigation that could affect the sale.
Review employment agreements: Review employment agreements to ensure they comply with labor laws and regulations.
Update policies: Ensure that company policies are up to date and compliant with current laws.
Consider hiring a lawyer or compliance expert to thoroughly audit your business and identify any compliance gaps.
2. Value Your Business Accurately
Next, ensure you value your business accurately. Valuing your business helps to set a realistic asking price without undervaluing or overpricing it.
Business Valuation Methods
Several methods can help determine a business’s value, each with its own advantages and disadvantages. Here’s an overview of the main business valuation methods:
Market-based valuation: This method assesses your business’s worth by comparing it to similar companies that have recently sold. It uses market data to gauge where your business stands in the competitive landscape.
Income-based valuation: An income-based approach focuses on the future cash flow your business is expected to generate.
Asset-based valuation: Your business’s worth is based on its tangible and intangible assets minus liabilities. It’s particularly useful for businesses with significant physical assets or intellectual property.
Industry-specific methods: Some industries have specialized valuation methods tailored to their unique characteristics. For example, a company from the technology sector can calculate its value based on its earnings before interest, taxes, depreciation and amortization (EBITDA) using industry-specific multiples.
Key Value Drivers
Evaluating the strengths, weaknesses, opportunities and threats to your business will allow you to sell your business for the most profit. Let’s look at them and how they impact the price of your business.
Strengths: Identify the strengths that make your business unique. Why do people do business with your company vs. your competitors? Can a new owner build on these strengths and enhance them? Which types of potential buyers for your business might be able to leverage these strengths? Those who can are likely to pay more for your company.
Weaknesses: Let’s say you have the most exceptional product on the market but lack the sales expertise to grow the business. A larger company that already has a sales team in place will see this as an opportunity to expand its business and may pay a premium to acquire your product and company.
Opportunities: Opportunities for your company to grow and be more profitable can either be strengths, weaknesses or things that you haven’t done. For example, you could have a profitable business within a specific region of the country. A potential buyer may then see an opportunity to grow the company on a national scale. This can increase the value of your business.
Threats: Perceived threats to your business can decrease its value, so it’s essential to have answers for how your company can overcome them. For example, if you own a limo company, buyers will naturally be concerned with brands like Uber and Lyft. To increase the potential selling price, you will want to point out what makes you different, such as your service level, client satisfaction and long-term clients who prefer to book offline.
Professional Valuation
To get the best price for your company, you want to work with a business broker or mergers and acquisitions (M&A) firm that knows your industry well. Their expertise will allow you to reach more buyers, position your business correctly and speak the language of your industry.
Pricing a business properly is an integral part of maximizing the sale price of a company. The best strategy is usually to price it a little higher than you usually get for companies that are similar to yours. This allows you to leave some room for negotiation, and you may end up getting the full price when you get enough buyers interested.
3. Market Your Business for Sale
In selling any business for the highest price, you want to have a great marketing plan. Marketing your business for sale effectively will attract the right type of buyers and achieve the best price.
Create a Compelling Offering Memorandum
Develop a detailed document that outlines your business’s strengths, financial performance, operations and growth potential. Include metrics such as revenue, profit margins and customer demographics. Emphasize what makes your business stand out, whether it’s a strong brand, loyal customer base or proprietary technology.
Market the Business Confidentially
You want to reach as many potential buyers as possible while keeping the sale confidential to avoid alarming employees, customers or suppliers. An experienced business broker is skilled at writing ads to bring in the right buyers and qualify them so that you focus on the best buyers who are most likely to give a good offer and have finances in place to close on the deal.
A top business brokerage will advertise the business through many different avenues, including the internet, email marketing and social media. They also have a large network of contacts in similar or related industries and private equity groups. Additionally, your business broker will require potential buyers to sign a nondisclosure agreement (NDA) before sharing sensitive information about your business.
Keep an Open Mind on Potential Buyers
The best offer may come from a buyer within your industry or from outside your sector. Of course, we want to make sure all potential buyers are financially qualified to buy your business at the highest price and have the necessary skills to run your business. Still, as long as you are willing to stay on after the sale, you can teach them or a manager that they hire how to run the business. That brings us to the next topic.
4. Negotiate the Deal
After receiving a few offers, it’s time to negotiate. This process takes several steps.
Offer a Smooth Transition Post-Sale
To sell your business for the highest profit, you must offer a transition period to most buyers. Even if they already know the industry, they will want you to stay on to introduce them to the employees and customers and teach them the way that you do business. Transition periods vary greatly and depend on the needs of the buyer. As long as you are open to providing what the buyer needs, that is a benefit.
After the transition period, the owner’s function in the business will need to be replaced, and someone will need to learn these functions in the company. Training new business owners will help sell your business for the highest price.
Define the Owner’s Role in the Transition
It’s good to have people within your company who can fill in for you when you are on vacation, and this also makes it easier when selling your business. Ideally, the owner’s job function can be easily replaced.
Department managers and salespeople who manage relationships with customers are a plus. The more the owner is involved in the critical aspects of the business, the longer the transition period that is typically needed.
Build Trust Through Transparency
The more open you are about the details of your business, the greater the confidence that potential buyers will have in terms of the success of your business going forward. Also, establishing good relationships with prospective buyers helps to increase the value of the offers that they provide. Every buyer wants to feel that they understand your business and can work well with you during a transition and continue to build on the company’s success after you are gone.
Use Effective Communication Strategies in Negotiations
Communication is essential in every relationship. You want to communicate well with potential buyers and your advisors, such as your attorney, accountant, and Business Broker or M&A Advisor. This will establish trust and keep things moving forward to overcome any roadblocks to getting the maximum value for your company. You also want to have advisors who are good communicators and have experience in the process of selling a business.
Create Competitive Tension With Multiple Offers
Nothing gets people interested in something more than knowing that other people are interested in what they want. Your business broker will use a marketing plan to generate many potential buyers. They would also let potential buyers know that there are others interested in the business. This will provide buyers with a sense of urgency and move them along. Multiple offers provide leverage in negotiations and go a long way in maximizing the value of the sale of your company.
Use Strategic Negotiation Techniques for Maximum Value
Getting multiple offers goes a long way in getting your full asking price. However, it’s important that your M&A advisor explains the offers so that you understand them. The proposal with the highest price isn’t always the best offer. It’s also about the structure of the offer and the buyer.
How much will be paid at the closing and after the closing?
Are there any contingencies to the offer, such as the buyer obtaining financing?
How long of a period will the buyer need to do due diligence?
Are you comfortable with the buyer taking over your business?
Once you understand the offers, then you can decide which buyers to negotiate with and what is most important to you in terms of the overall amount at the closing.
5. Do Due Diligence and Close
You want to complete due diligence as quickly and efficiently as possible. It’s essential to have an accountant who is accessible and available in providing all of the necessary documents and communicating effectively with the buyer’s accountant. An experienced business broker will also know what is typical in due diligence and negotiate any differences in the expectations and length of the due diligence.
You want to select an attorney to represent you who has experience in the sale of a business and has enough time to devote to getting the purchase and sale agreement negotiated with the buyer’s attorney. If there are any roadblocks, then a good business broker can often get both sides looking for a compromise to satisfy both parties.
Maximize Your Business Sale Value With Synergy Business Brokers
Synergy Business Brokers offers the best of a Business Brokerage and M&A Firm. We have over 17 years of experience selling businesses for the maximum price. We don’t charge an upfront fee and only get paid a percentage of the purchase price, so our goal is always to sell a business for the highest price.
We do this by marketing the business aggressively to create the most potential buyers, then communicating effectively with buyers and the seller to establish good relationships and transparency. This helps to develop multiple bidders and gives you the best opportunity to maximize your price when selling your business.
We specialize in selling businesses with annual revenues of $700,000 to $250 million in manufacturing, technology, construction, distribution, services, healthcare, engineering and transportation. Contact us for a confidential consultation.