Selling a business involves several steps.
To get the maximum return on your business, it's important to plan properly for the sale. — Jovanmandic/Getty Images

Selling your small business is a multi-step process, and proper planning is necessary to maximize your potential returns. Here are five things you should know before you get started.

Tie up any loose ends

It’s common knowledge that if you want to sell your home, you need to get your house in order first. You wouldn’t expect potential buyers to be excited about your house if the walls needed repainting and the roof leaked.

The same concept applies when you’re selling a business. If your contracts are unclear or your balance sheet needs some work, the value of your business will decrease.

Here are a few ways you can make sure your business is ready to sell:

  • Hire a reputable accountant to audit your financial statements.
  • Review your crucial employment contracts and make sure these employees are incentivized to stick around after the sale.
  • Have an intellectual property attorney review all of your business contracts.
  • Make sure your business is set up efficiently so that, in the event of a sale, you’ll pay the lowest amount of taxes possible.

Ideally, you’ll begin this process at least a year before you plan to sell the company.

Understand valuation

Unless you’re a CPA, you may not understand precisely what goes into determining the valuation of a business. And that’s okay, but you should understand the general process.

Cash flow and EBITDA (earnings before interest, taxes, depreciation and amortization) are the main factors used to determine business valuation. So if your business revenue is high but you don’t have a lot of free cash flow, the value of your business will fall.

Interested buyers will consider non-financial aspects of your business as well. For instance, do you have a strong management team in place? Can the company run successfully without you?

Contact a business appraiser to get a detailed explanation of what your company is worth. Going into negotiations, this will lend more credibility to your asking price.

Selling your small business is a multi-step process, and proper planning is necessary to maximize your potential returns.

Don’t neglect your business during the process

One of the biggest mistakes you can make is to start focusing on the deal and ignoring your business. This is a costly mistake to make because the deal isn’t done until everyone signs the paperwork. If your company’s revenue suddenly declines in the months leading up to the sale, the buyers could come back to the table and ask for a lower price.

So, in the months leading up to the sale, make sure it’s clear who is focused on running the business and who will be negotiating the sale.

Be prepared to answer the buyer’s questions

Before you sell your business, you should be ready to answer a lot of questions from potential buyers. First of all, most buyers will want to know why you’re looking to sell the business.

Are you selling the business because you plan to retire, or are you selling it because the business isn’t profitable? You should also be prepared to answer in-depth questions about your company’s history, how you came up with a valuation and whether your business can run without you.

Be as upfront with potential buyers as possible, and don’t try to gloss over your business’s flaws. If your company has an underlying problem, prospective buyers should hear about it from you.

Have a plan for after you sell

Finally, you should have a plan for what you’ll do after you sell the business. Even if you’re selling the business to retire and spend more time with family, you should still have personal goals you’re working towards. Without them, you’ll likely find yourself bored and unmotivated.

And give yourself some time before you spend any of the profits from the sale. This will give you a chance to learn what your tax responsibilities are and to think through your financial goals.

[Learn More: 8 Timeless Business Lessons From Hallmark Christmas Movies]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published January 09, 2020