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The Art of Selling a Business

This will be a two part series. First, I will address the Art of Selling a Business.

It is important to know that having an exit strategy is an integral first step in starting a business. It may seem paradoxical, but one must be thinking about what is my ultimate goal in creating a business. I suggest that if it is to ultimately sell your business, start running the business as if a buyer will come along at any moment. Whether it is now, five years or 10 years down the road, if you are not ready and that buyer comes, you may not get that price you want.

It is critical to establish a valuation for your business. There are many formulas for determining the value. One possibility is to consider selling for 3.5-4 times net income or alternatively .75-1x gross sales. Mind you, these are general rules only. A business ultimately is sold for what the buyer is willing to pay and the seller willing to accept.

One should have potential buyers sign a non-compete, nondisclosure, confidentiality agreement with a substantial penalty say for example $25-50,000, before providing any information to prospective buyers.

A seller must decide also whether to hire a business broker or attempt to sell one's business by oneself. It is difficult to manage one's business and field buyer inquiries at the same time. On the other hand it is important to use a broker who specializes in selling businesses and not simply any real estate broker. One can expect to pay a commission of 6-10% on the sale price. If one chooses this route, one must consider how long a contract to sign and is it an exclusive contract to sell.

It is vital to be clear as to what the business broker intends to do and how they will market your business. It is fair to say that I suggest allowing yourself perhaps 1-3 years to sell a business and to choose a buyer that will represent you into the future. Some years ago I chose to sell for a lower price to someone whom I felt would carry my business on into the future and uphold the reputation I had built.

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