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Selling Your Small Business: How to Prepare & Maximize Your Value

Small Business
older business owner discusses with two colleagues the process of selling your small business

After spending years building a small business, it can be hard to imagine doing anything else. But part of being a successful business owner is knowing when to make your exit, either because it might be time for someone else to lead, or because it might be the right move for you financially. Whether you're thinking of selling your small business soon or years down the road, these tips can help you prepare.

Reasons to Sell a Company

A common and obvious reason for selling your business is that you are ready to retire. The proceeds from selling could provide some of the money you'll need to stop working.

But you don't have to wait until retirement to sell. Maybe you've had enough of running your business and would like to move onto something new. Selling would free up your time and help you finance your next venture. If you aren't ready to leave altogether, you could set up a gradual exit, where you work part-time with the new owners.

Another time to consider selling is when the market conditions are ideal for a sale. You sense you can get a high price now, in other words, but the current conditions might not last forever. For example, construction companies were selling at a premium during the housing boom from 2002 to 2006, but were extremely difficult to sell after the market faltered. This is why it can be important to prepare your business for a sale, even if you aren't in a rush to sell. When the market is right, you want to be able to take advantage.

How to Sell Your Business

Getting your small business ready for a sale isn't a quick undertaking — another reason to begin preparing well ahead of time.

First, you should get a professional appraisal of your business's worth. This could be significantly different from your personal opinion. By getting a professional appraisal, you'll know what range of offers to expect in the future so you won't be surprised or frustrated. Also, the appraiser may identify ways for you to increase your business's value.

Get your tax returns and financial statements from the past two to three years and make sure there aren't any mistakes. Buyers will closely examine these documents to determine a sales price during the negotiations. You should be training your employees so they could run everything without you. Any buyer will want to know the business will keep earning money without you being there every day.

In the years leading up to a sale, you should work to increase profit and maintain financial priorities as much as possible, because higher revenues could lead to a better sales price. And since it can take time to find an interested buyer, you may want to get the word out sooner rather than later once you're ready to sell, perhaps by contacting a business broker.

Using a Buy-Sell Agreement

If you have business partners or want to pass on your business to another person, it may make more sense to set up a buy-sell agreement rather than sell on the open market.

A buy-sell agreement is a contract between a business owner and other key parties. It explains under what situations the business will transfer, like if one co-owner dies, retires, becomes disabled or decides to leave the business for another reason. It will state who needs to buy the business, how they will come up with the sales price and how they will pay for the buyout, whether it's all at once or over several years.

If you have co-owners or business partners, setting up a buy-sell agreement is one way to help remove uncertainty. It prevents a co-owner from leaving the business and selling their shares to someone you don't want to work with. You'll know exactly who will take over if a co-owner leaves.

A buy-sell agreement also makes your planning more predictable, because it lists who will eventually buy your ownership share and how you'll establish a valuation. You don't have to worry about searching for a buyer and negotiating a price.

Planning for Life After the Sale

Getting ready for life after the sale is just as important as processing the deal. Consider meeting with a financial representative to determine the most tax-efficient way to handle the sale proceeds. You may want to structure the future sale so the money is paid out over several installments. That way, you don't owe all the taxes at once and could avoid moving into a higher tax bracket.

You should also consider whether you would be willing to stay involved with the business after the sale. Some buyers may want you to stay on for a period of time to help the transfer go smoothly. This could be a fruitful way to transition to your next stage in life.

Beyond that, start thinking about what you want to do after leaving. After spending most of your days running a business, it can be emotionally challenging to suddenly find yourself with lots of free time, especially if you're retired. Make sure you have a plan to fill up the weeks, such as with volunteering or working part-time.

Remember, getting ready to sell mostly involves improving your business. Whether you ultimately sell your small business or not, going through these steps early should help to leave you in a stronger, more organized financial position.

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Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.