Selling a small business without the help of a broker can be challenging but incredibly rewarding if done correctly. Handling the process on your own helps to avoid expensive brokerage fees while maintaining complete control over the entire process.
It is vital to ensure you have thoroughly prepared your business before putting it up for sale to maximize its value and attract potential buyers.
This guide elaborates on these steps to empower you to sell your small business without paying hefty broker fees or risking missing essential details which could make or break the deal.
Understand the Marketplace – Research Similar Businesses to Get an Idea of What They’re Worth
As a business owner planning how to sell a small business without a broker, the best way to understand the marketplace and assess its current conditions is by conducting thorough research.
Detailed research would include looking at similar businesses that recently sold or are currently up for sale. You should also research trends in the market.
It also requires you to be aware of new laws, regulations, or technological advancements that could affect your business’ value when it comes time to sell.
There are benefits of working with a business broker when selling your business. For instance, these experts understand how to conduct a business valuation, where to get qualified buyers, and will keep the sale details confidential.
A business broker will also handle the detailed process, including negotiating a deal on your behalf and structuring the deal. However, an experienced broker will likely charge hefty fees.
If you’re working without a broker, understanding how demand has shifted due to changing consumer preferences can help inform pricing decisions.
You can analyze macroeconomic data such as GDP growth rates and unemployment levels to shed light on the broader economic forces that may influence buyers’ willingness (or lack thereof) to purchase a specific business during a particular period.
Perform comprehensive research before selling your small business without a broker’s assistance. This ensures you are fully informed about all process aspects and better equipped with the knowledge you need to succeed.
Once you decide to sell, keeping the details confidential is crucial by enforcing a non-disclosure agreement (NDA). Signing an NDA ensures that the other party keeps sensitive information you share during the negotiating process private and confidential.
It also protects you from legal action if a buyer backs out of the purchase after discovering certain aspects of the business.
Enhancing your business’s value by maintaining smooth and efficient operations is also vital. You can improve by modifying customer support practices or upgrading outdated technology.
Create a Marketing Strategy for Selling Your Business
An effective marketing strategy is essential for selling a small business without broker assistance.
It involves developing a comprehensive plan outlining how to advertise the business best and reach potential buyers.
Consider identifying target markets, creating promotional materials such as brochures or websites, and using traditional and digital advertising forms like radio spots, television commercials, social media posts, etc.
The goal should be to create buzz around the sale, so interested buyers know it is happening and come forward with offers. Networking opportunities can also prove invaluable as they allow you to connect directly with those interested in your business.
Another important step when crafting the perfect marketing strategy is to conduct market research beforehand so you can make well-informed decisions regarding pricing and other details related to the sale of your small business.
Understanding the selling price or current listing price of similar businesses can help you know the price range potential buyers might expect when considering your business’s value.
It helps you decide the fair asking price and negotiate favorable terms during negotiations later on if necessary.
Furthermore, market research also provides valuable data about trends within specific industries or geographical regions. Such information could help inform decisions regarding where to place advertisements or network with potential purchasers more effectively, depending on their preferences or needs.
All these components work together to ensure an efficient and successful sales process.
Calculate the Value of the Business – Consider Income Statements and Determine How Much You Could Ask for Your Business
Calculating the actual value of your business is an essential step in selling a small business without broker assistance. The first step to determining this figure is calculating the business’s intrinsic value.
This value considers tangible and intangible assets such as brand recognition, customer loyalty, and any proprietary technology you can sell individually or use in other businesses.
It also accounts for liabilities such as debts you currently owe or unpaid taxes, which you must account for before realizing any profits from the sale.
You can calculate the value of your business using several methods, but the two most popular are the discounted cash flow (DCF) and the multiples methods.
The DCF Method
The DCF method considers your business’s projected cash flow. You’ll use your projected cash flows for the following three to five years and a formula to determine the current value of these cash flows.
The value of your business should be more than your initial investment amount. The formula is:
Current value = Cash flow year 1/(1+ discount rate) + Cash flow year 2/ (1+ discount rate)2 + Cash flow year 3 /(1+ discount rate)3
The Multiples Method
The multiples method presumes that similar businesses have a comparable selling price, so you’ll need details about another company in your industry that recently went on the market.
You’ll divide the sales price of that company by its earnings before interest, taxes, depreciation, amortization (EBITDA), earnings before interest and taxes (EBIT), or total sales.
The figure you’ll generate is your multiple. You can then multiply the number by your business’s EBITDA, EBIT, or sales.
The multiples method is more straightforward and involves the following four steps:
Step 1: Disregard Capital Assets When Calculating Your Business’s Value.
Most small business owners associate the business value with the asset value. However, this common misconception is false as these two entities are independent, and here’s why.
- Let’s say your business has trucks worth $50,000, financial backing of $100,000, products and supplies worth $150,000, and an office block worth $600,000
- These capital assets add up to $900,000
- If you sold everything the business has, this would be the amount you expect; hence, it’s the business value.
Although this information may be correct, it’s not the meaning of business valuation or worth. This figure represents the amount of money tied up in the business.
Buyers will only pay attention to the possible amount they can make by selling your trucks or office block. They want to see how much they can earn from your business’s services or products.
Step 2: Determine Profitability Through Outgoing Payments and Gross Income
Profits determine your business’s value. Potential buyers want to know the possible amount they can make after taking over the company now and in the future.
Valuing your business means considering the net profit through two crucial aspects.
Multiples
Multiples measure longevity and range between two and ten, depending on the business size and the risk factors involved. When you sell your small business, you don’t anticipate it to close soon, so the question is, how long can it run and earn profits for the new owners?
You’ll multiply your business’s net profits by any reasonable multiple.
Profitability Adjustments
It’s likely that your business generates a different profit each year. When calculating your business value, you must determine the profit, loss, or growth you expect based on the applied multiple.
Part of this involves examining your business’s historical financial data, competitors’ progress, and the expected growth in your market.
Step 3: Calculate the value.
This step involves the actual mathematics or calculating value using four elements:
Your Net Income
Calculating your net income involves deducting all expenses from the business’s gross profit.
Multiples
Smaller or riskier businesses have a lower multiple. You’ll use subjectivity and guesswork to determine your business’s unique multiple. There’s no definite way to find the multiple, but here are the general rules of thumb:
- Research your industry and find out what similar businesses sell for.
- Evaluate the health status of your business’s financial history
- Weigh whether your business is stable enough to suit a higher multiple
- Assess the state you’ll leave the company after the sale
- Consider whether you have guaranteed contracted income for the following years
- Determine the scope of your customer base and the strength of supplier relationships
You can decide the most suitable multiple for your business based on these variables. A multiple above three is generally unlikely if one person can run your business. If the revenue is less than $500,000, the maximum multiple is five.
Double digits only apply to larger businesses with over $500,000 in net profits.
Market
The market affects valuation since it determines your business’s profitability for the next few years. You can use historical figures in a stable market since there’s minimal movement.
If the market is new, you have an excellent opportunity to raise your numbers.
Growth Rate
You need to compare your business’s growth rate with the market. For instance, if the market growth was 14% the previous year and your growth was 12%, buyers can be confident they’ll experience similar growth rates.
Step 4: Consider your Market Valuation.
Valuation gives potential buyers a reasonable answer to how much your business is worth. However, this doesn’t mean it’s the actual worth of your business.
The worth of your business will be what the market dictates. For instance, suppose you value your company at $1.2 million and meet several potential buyers who disagree with the valuation and can only pay up to $1 million. Your business’s value, in this case, will be $1 million.
Once you calculate these factors, you can add them together to arrive at an estimated intrinsic value for the business today.
Ultimately, all this data provides an accurate estimate of how much your business might fetch when put up for sale, giving you the vital information you need to set the terms and negotiate with interested buyers.
Have Legal Documents Prepared to Provide Buyers with Essential Details on the Terms of the Sale
Realistically, not all businesses find buyers, and not all potential buyers will proceed with the deal. Therefore, legal documents are crucial as they protect you and your business in case negotiations fall through.
The most common legal documents that you need to prepare to include the following:
- A Confidentiality Agreement (NDA) outlines terms concerning how any sensitive information shared between buyer & seller must remain confidential throughout negotiations
- An Asset Purchase Agreement outlining all aspects of the sale, including price, payment options, etc.
- A Bill of Sale officially transfers ownership from one party to another once every part to it meets the agreed-upon conditions.
- Post-Closing Agreement
- Current Lease Agreement
- Business Professional Certificates
- Existing client/vendor contracts
- Employment Agreements
- Enterprise Insurance Policies
Understanding the implications of these documents in selling your small business is essential. These documents are legally binding, so review them carefully before signing.
For potential buyers to assess the value of your small business before making an offer, you must provide them with comprehensive financial statements detailing your business’s finances.
The reports at hand include balance sheets showing assets and liabilities and income statements indicating the total revenue that operations generate within specific periods or years. Profit and loss statements also come in handy.
You should also provide copies of tax returns you file for the business so that interested parties can get an accurate picture of its current financial state and how much they might expect in taxes post-purchase if they decide to go through with it.
All these documents are valuable when determining whether or not a particular business is worth investing in – so taking extra care when preparing them can make all the difference when selling without broker assistance.
Connect with Potential Buyers
Connecting with potential buyers is critical in selling a small business without broker assistance. One of the most effective ways to reach interested buyers is through networking. You can achieve this by:
- Attending industry events
- Contact individuals or businesses you think might be an ideal fit for your venture.
- Utilizing online platforms such as Linked In and other social media channels which allow you access to larger pools of qualified buyers
Screen Interested Buyers – Ask Questions About Their Experience and Background
It’s essential to take the time to thoroughly qualify any prospective purchasers before entering more serious negotiations.
Therefore, ask questions about their financial capabilities and willingness to invest in your business and conduct due diligence to ensure they are legitimate buyers with what it takes to complete a successful transaction.
This process also involves verifying their financial capacity to purchase the company and ensuring they suit the business.
To do this, you should request copies of bank statements, credit reports, and other documents related to the buyer’s finances to get an accurate picture of their capabilities when it comes time to purchase if the terms are agreeable.
You must also assess whether a particular individual can take over operations successfully by looking at past experience and any references they provide.
Being familiar with industry trends & regulations within your particular sector may prove beneficial.
It would help if you considered conducting background checks on prospective purchasers so that you can address any red flags arising from the research during initial meetings or negotiations.
Doing so ensures that all parties will remain committed throughout the sales process.
Negotiate Terms – Consider All Offers and Be Open to Counter Offers to Ensure You Get Top Dollar for Your Business
Once the negotiation begins, addressing any major concerns regarding the sale is vital.
This includes discussing payment terms and conditions and deciding on contingencies should specific criteria fall short or other circumstances that could potentially change the course of negotiations.
You and the potential buyer must consider what covenants and promises are part of the agreement so that everyone involved understands and agrees to all expectations before signing any binding contracts.
It is also essential to review any other agreements or promises made between you and the buyer, such as those pertaining to warranties, indemnification, and other matters related to liability. It ensures both sides understand their obligations post-sale.
You should also address transition issues, such as managing employees during and after the transfer of ownership.
Ensure everyone from the top down understands what lies ahead once the deal is final to have a smooth transition during and after the sale.
Once the negotiation process begins, it is essential to remain organized by ensuring you prepare all documents involved in the sale ahead of time, such as asset purchase agreements, bills of sale, etc.
Furthermore, having clear communication between both parties is paramount. Keep an open line of dialogue, so everyone knows exactly where things stand concerning any offers made or accepted.
Clear communication helps to prevent misunderstandings down the line when terms need finalizing before closing the deal.
Ultimately taking these steps when learning how to sell a small business will help ensure everything runs smoothly during negotiations and result in successful sale completion – something you and the buyers involved want at the end of the day.
Final Thoughts on Selling a Small Business
Selling a business without a broker is a challenging but rewarding endeavor that allows you to take control of the process while saving on broker fees.
By understanding the marketplace, calculating your business’s value, creating a strategic marketing plan, preparing legal documents, connecting with potential buyers, and engaging in effective negotiations, you can successfully sell your business on your own terms.
Remember to stay organized, conduct thorough research, and maintain open lines of communication throughout the process. With perseverance and attention to detail, you can achieve a smooth transaction and a successful sale, paving the way for new opportunities for both you and the buyer.