How to prepare for the sale of your business

As small business owner baby boomers near retirement age, many are looking to sell their businesses. Many are struggling to understand what their business is really worth, why it may not be worth what it was a few years ago and how to time the ultimate sale of the business.

Instead of holding out for a price that others may have been able to sell for a few years ago, business owners should evaluate what they want and what they need for the business, says Scott L. McRill, CPA, a director in transaction advisory services at SS&G.

“If an owner is ready to get out of the business, he or she should to take a hard look at how much they really need to get out of the business to achieve their remaining goals, rather than focusing on what they wish they could get out of the business,” says McRill.

Smart Business spoke with McRill about how to prepare your business for sale.

When selling a business, what do owners need to consider?

Aside from proper preparation for the sale process, owners should consider their remaining life goals and understand how the sale of their business can impact achievement of those goals. In many cases, an owner has a number in mind of what his business is worth or what he wants for the business, but has not thought through how much net cash he would take away from the sale and what that really will allow him to achieve in retirement.

Some owners might be surprised at the gap between the gross sales price and net cash taken away from the sale of a business and conclude the price is not high enough. Others might learn that they don’t need quite as much as they thought to achieve their goals.

This type of ‘need’ analysis was seldom done in the years leading up to the downturn, as business valuations were generally higher, sellers were generally getting what they wanted for their businesses and if the offer was not high enough in the sellers eyes, they held out for another offer.

Is now a good time to sell a business?

Deal activity moves through cycles over time and we have clearly been in a down cycle over the past couple of years, with a difficult economy, lower business profitability and a difficult lending environment, which all point to lower valuations and lower deal volumes. That being said, we are seeing improvements in business profitability and the lending environment. Many owners are realizing the valuations of a few years ago may not return for some time, so the gap between buyer and seller expectations in terms of value is starting to close.

All of this points toward signs of increasing deal activity in the months and years to come. For a business that has already seen the low point in terms of profitability, now might be a good time to sell in order to avoid some of the uncertainty in Washington regarding future tax rates. This of course has to be balanced with many other factors, including future profitability of the business and potential increases in business valuation, which could offset the tax uncertainty.