Dennis Zink: Norm, many business owners choose to sell their business. Why might they do that?
Norm Silverstein: The major reason is retirement. Many owners reach the point where they want to retire. They've had the business successfully for over many years and they just want to retire and play golf all day long. Sometimes there are partnership disputes so that could be another reason why an owner would want to sell their business. Sometimes there is a diminished interest in the business or just boredom. After running a business for so many years the owner decides that he just wants to sell and do something else or retire.
Sometimes there's an illness or the owner dies and the family wants to sell the business. Sometimes the company has reached a point where it's beyond the capacity of the owner to continue funding to get to the next step. There are various reasons why an owner or owners want to sell their business and most of these reasons are legitimate.
Dennis: I would think that if an owner got to the point where they really couldn't manage it anymore, if they were astute enough they could hire a professional manager to come in and fill the gaps that they didn't have to take it to the next level. Do you see that happen sometimes?
Norm: They could but, taking it to the next level requires additional capital and a manager or somebody who's been working in the business. You have to pay that manager which means you’ve got to make less money yourself. So there are advantages and mostly disadvantages of doing it that way.
Dennis: Okay, so I'm a business owner and I'm at the point where I actually have made a decision to sell my business. How would I prepare my business for sale?
Norm: Number one you must have good financial records. You must have tax returns. You must have profit and loss statements for each month of the business for the past three years. You should have the terms and the purchase price in the back of your mind as to what you want for the business. Most importantly, if you've been taking cash, you should be reporting it or have reported all of the cash so that you won't be questioned by a buyer to prove your cash inflows. That's very important.
Again, I emphasize keeping good books and records that a prospective buyer could review.
Dennis: How would I establish a selling price?
Norm: A lot of owners think that their business is worth a certain percentage of their gross sales which is not basically true. If an owner truly wants to sell their business he should consult with his accountant who has some ideas or some knowledge of how to price a business. Even though you can get a hundred accountants in a room and have a hundred different opinions, the point is to get an idea.
The best thing that I would recommend is to consult with an intermediary who is familiar with pricing a business and can help the owner establish a reasonable purchase price that would be acceptable to a buyer. That would be my ultimate suggestion.
Dennis: What preparation should I do as a business owner in the way of a prospectus for interested parties? What should I give to someone who's interested in taking a look?
Norm: I would prepare a business presentation plan. Basically, that's like a business plan that a buyer who's looking for funding would prepare. It would have a summary of the business, how it started, where it's been, where it's going. It would have in that summary a profit and loss statement showing. Not a full profit and loss statement but showing what the earnings have been, what the profits have been for the past several years, where the business is heading in the future.
You want to have something to hand to a prospective buyer or to a business broker or business intermediary who can prepare a summary to give to prospective buyers. It’s better to have something tangible that could be given rather than just an oral representation of the business.
Listen to the full podcast or contact a SCORE mentor to learn more about selling a business.
About the Podcast Guest: Norm Silverstein
Norm Silverstein whose primary expertise is assisting buyers and sellers of small to mid-sized businesses. Norm has owned his own business brokerage company for 10 years and merged with another company in 2006. Having completed hundreds of business sales and transactions, Norm is experienced in mergers and acquisitions, business valuations, performing due diligence, determining the real cash flow of a business, and everything that it takes to bring buyers and sellers to the closing table. Norm has been a SCORE certified mentor since 2012.