Buying or Selling a Small Business

Buying or Selling a Small Business? Make Sure You Plan Ahead

At one time or another, just about every small business owner considers either buying another company or selling his or her own.  Sellers need to start planning an exit strategy several years in advance of a potential business sale. According to an IBBA study, retirement continues to lead as the number one reason for selling a business.  As the baby boomer generation exits the work force there will be increasing opportunities to purchase established small businesses. Whatever the case may be, if you ever find yourself heading toward a business sale, it is critical to have a solid foundation laid out in front of you.

Define Your Intentions

You might be surprised to learn how many business owners leap headlong into sale negotiations without taking the time to clearly establish their intentions.

If you’re a buyer, identify your goals and your tactics for achieving them. Typically, buyers can be divided into two main categories: financial (show me the money!) and strategic (show me the synergy!).

For example, what’s the most you’re willing to pay? A financial buyer is typically more focused on this threshold, as only dollars and cents are at stake. On the other hand, a strategic buyer might be more flexible, as the eventual benefits of the merger can be more important than the immediate cost.

Sellers should pose similar questions: What’s the lowest offer you’ll accept? Are you in a hurry to sell? What conditions will you require as part of the sale? Also be prepared to speak confidently about your business’s strengths and address any perceived weaknesses.

Do Your Research

Of course, you also must get to know the party you’ll be dealing with. As a buyer, for instance, you should have a thorough understanding of the business — gained through extensive due diligence. You will probably be better off if you get professional help conducting this research.

From a seller’s standpoint, due diligence is also important. You need to know that your buyer can afford to purchase the business and, if the deal will be seller-financed, how well the company will be run while the note is being paid off.

It’s also helpful to learn if your buyer has looked at many other businesses. Buyers who know they have other options if your deal falls through will probably drive a harder bargain.

Price Shouldn’t Be Your Only Concern

In a business sale, focusing on price is more than understandable. But selling a business is a complicated process, and agreeing on price is only one component. The U.S. Small Business Administration suggests the following checklist of items that should be addressed in the agreement:

  • Names of seller, buyer, and business
  • Background information
  • Assets being sold
  • Purchase price and allocation of assets
  • Covenant not to compete
  • Any adjustments to be made
  • The terms of the agreement and payment terms
  • List of inventory included in the sale
  • Any representation and warranties of the seller and buyer
  • Determination as to the access to any business information
  • Determination as to the running of the business prior to closing
  • Contingencies
  • Fees, including brokers fees
  • Date of closing

As you consider these various factors, don’t become overly resolute on any one. Remain flexible and be willing to perhaps compromise on some elements to get the ones that are most important to you, such as those related to financing terms, the closing date, employee retention or seller warranties.

Consider the Details

As you can see, acquiring another company or selling your current one entails many, many details. That’s why it’s best to “think small” — consider all of the little things before you leap into negotiations. By planning carefully and negotiating wisely, you’ll give yourself a better chance to get the best deal possible.

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