There’s a lot to know about the process of selling your business, from if you should even sell to what your business is worth. Here are some of the most frequently asked questions.
The Six Most Frequent Asked Questions about Selling a Business
What is my business worth?
A business is only worth what buyers will pay for it — the way you value the business must align with how the buyer values it. While you can reach the value your business with an expensive certified business appraisal or select one (or a combination!) of less-expensive business valuation methods, valuations are not asking prices. However, these methods provide valuable context for your asking price through data and information.
Other considerations go into determining an asking price like the fact the selling price is typically lower than the asking price; the way the story of your business will impact the sale price; current industry trends; and the buyer’s financing options.
There are resources that can help you determine the value of your business and an appropriate asking price, such as Guidant Financial’s Seller’s Suite, which uses six valuation approaches and comes with materials to present your business to potential buyers.
Learn more in Chapter 2: How to Pick an Asking Price.
How do I value my business?
There are two primary ways of obtaining your business value: business appraisals and estimated valuations. While they both provide accurate information about the value of your business, which method is best is dependent on your situation.
Business appraisals are generally more expensive and often more time consuming. They’re the highest standard in valuing a company and are typically required for legal purposes like tax issues or bankruptcy.
Estimated business valuations can’t be used for legal purposes, but they serve as a good starting point in the business selling process and a usually much less expensive than business appraisals. Estimated valuations are generally like an appraisal but are much shorter and heavily dependent on the financials provided by the business owner.
Quality estimated business valuations should include multiple approaches and methods as a part of the analysis. Common approaches include:
Using your company’s balance sheet, the asset approach calculates the value of the business’s assets less the value of the liabilities.
Discounted Cash Flow (DCF) Method
The DCF method utilizes your three-year forecast to estimate the business’s future cash flow.
Capitalization of Earnings (COE) Method
Like the DCF method, the COE method uses income projections to estimate future cash. Rather than using the discount rate, COE uses the capitalization rate.
The Market Approach utilizes the value of similar businesses and assumes they are worth a similar amount.
The EBITDA Multiple Approach provides what is considered the ‘value ceiling’ for the company. The business’s EBITDA is multiplied by a factor, which ranges from zero to four based on the business’s life cycle stage and industry revenue volatility.
Learn more in Chapter 1: How to Value Your Business.
How do I know if I am in a position to sell my business?
It’s important to make sure it’s worth your time to sell your business. If your business is valued at a low amount, it might be more cost-effective to wind down your business and close it out instead of putting the time and money into finding a buyer.
You’ll also want to build a thorough exit strategy and ensure it’s something you’re ready, willing, and able to execute. An actionable exit strategy includes a scheduled pre-sale clean up, choosing an asking price, deciding how and where to sell your business, creating a customer communications plan, and generally making sure you’re in a position to smoothly hand off your business to the new owner.
Learn more in Chapter 3: Creating an Effective Business Exit Strategy.
How do I sell my business when I need to focus on running it?
Many sellers turn to a business broker if they don’t have the time to properly market their business, prefer to focus on other things, or want to make sure the deal is done quickly. An experienced business broker can use their network and expertise to market your business where it’s most likely to be sold and connect with potential buyers. They can also help you determine an equitable asking price.
Using the services of a business broker is very much like working with a real estate agent to sell your home.
Learn more in Chapter 5: How to Find a Buyer for Your Business.
How will I know if someone can afford to buy my business?
Understanding the most common ways a business buyer can gain funding will give you insights into making sure a buyer is the right choice to sell your business to and can also give you a better idea of a good asking price for your business.
Seller financing is very similar to a bank loan, but the seller holds the note for the loan, and the buyer makes payments with interest to the seller.
Rollover for Business Start-ups (ROBS)
ROBS allows individuals with rollable retirement funds to use that money to finance a small business, whether it’s a start-up or the purchase of an existing business or franchise.
The SBA doesn’t fund an SBA loan directly, instead they encourage banks to lend to small business owners with favorable financing terms by guaranteeing up to 80 percent of the loan.
Unsecured loans are obtained in partnership with a specialized provider who finds credit cards with high balances, no cash advance fees, and no interest payments for the first year. The third-party firm then applies for and liquidates the credit cards on the borrower’s behalf. The result is an infusion of cash with no limitations on the type of business expense it can be spent on.
Portfolio loans (also known as a Securities Backed Line of Credit or SBLOC) are available to borrowers who have at least $85,000 in securities in an investment portfolio, which trade at $5 per share or higher.
Ask potential buyers if they have qualified for any funding options or send them to Guidant Financial to see if they qualified.
Learn more in Chapter 4: Business Financing Options for Your Buyer.
What are the costs of selling my business?
There’s no set-in-stone cost to selling your business, as expenses vary based on what methods you take, what tasks you do yourself, and what you hire out for.
Some common costs include:
Business Appraisal or Valuation
A business appraisal is typically more expensive than a valuation, with some starting around $5,000. Valuations, depending on the methods, can be much less expensive.
Guidant Financial’s Seller Suite is a one-time cost of $495 and includes five valuation estimates and a weighted average that makes the most sense of all the valuations for your business.
You may want to reach out to a business broker to help find sellers for your business. Some brokers will charge an upfront fee and/or a retainer while some will only take a commission (typically around 10 percent of the total sale price) when your business is sold, like a real estate agent.
A broker will often leverage business listing sites as part of their services, but if you chose not to use a broker, you may want to list your business yourself. Listing a business isn’t free unless you’re looking at a very general site like Craig’s List, which doesn’t have the same audience of those specifically looking to buy a business. The cost to list with reputable listing sites usually start around $50 a month.
Accountant and Attorney
You’ll likely want both an attorney and accountant to review the terms and financials of any deals made with the buyer of your business.