Small business sales are up for businesses that are highly organized and can demonstrate proven cash flow. Specific areas that interest buyers are current and past business contracts and partnerships, employee records and sales trends. Business management experts say transparency is the key and that buyers are attracted to owners who are willing to assist throughout the management transition. For more on this continue reading the following article from The Street.
You negotiated a well-deserved price for your successful business and have signed on the dotted line. The time has come to hand the business off to its new owners. But how exactly do you do that?
The market for small businesses sales is slowly improving this year, particularly as financing becomes more available to would-be buyers.
As of March 31, there were 1,172 business-for-sale transactions completed, up 2% from that time last year, according to BizBuySell.com, an online marketplace for buying and selling small businesses.
In general, businesses seem to be in better shape, allowing owners to sell their businesses at better prices.
The median revenue for small companies sales rose 8.1%, to $346,000, and the median cash flow amount rose 5.2%, to $84,175, according to the report, released April 5. It is the first quarter since 2009 in which median revenue and median cash flow for sold small businesses were up versus the prior year, BizBuySell said. Median sale price rose 3.3%, to $155,000 — still below the peak of $180,000 seen in 2009.
Kevin Reeth, CEO of Outright, a program that streamlines small-business’ taxes and financial transactions into a central database, talked with TheStreet about the importance of keeping organized during a business transition.
For business owners, what are some of the most important issues to be aware of during the selling process?
Reeth: The biggest thing is that you’re going to have to be pretty well organized. Anyone that is looking to buy your business is going to want to understand it; being organized can provide the buyer with all the essential information he or she needs.
In addition to the typical financial [questions], what kind of contracts and relationships do you have with customers? That’s going to be one of the most important things. And then it gets into some of the more details around that. If you’re a service-based business, do you have contracts currently in progress? Commitments for future work? And what are the terms? What are you contractually obligated to receive?
Also, if you have employees, make sure all your paperwork is done. A buyer doesn’t want to come into a business and find out down the road that you weren’t compliant and that they might be liable.
What about for buyers?
Reeth: It’s basically the flip side. First and foremost, [buyers] want to understand the customer base and what cash flow looks like. What money is really coming in? How much can they really rely on? They may be looking for ways to improve it.
Do you have contracts for business? Do they have repeat business? What processes have they used to engage customers? Do they have specific marketing campaigns? How are products and services priced? That’s kind of a starting point — looking at the cash flow of a potential business and whether you can rely on it.
What are some typical mistakes made by buyers before the transition?
Reeth: On the buyer side, one of the most compromising mistakes is not digging enough to understand cash flow base. You really want to press to understand the relationship between the business and the customers.
Yet so much of depends on the nature of the business. If you’re buying a business with a lot of equipment and capital access, [buyers] are going to want to inspect those. For a retail establishment, how long is the lease? What does the insurance look like?
How is a smooth transition ensured?
Reeth: Legalities aside, be very transparent about your expectations. By doing that, that allows you to build trust with the person selling the business. Just make sure to protect yourselves and they deliver what they say they have.
One of the things that I’ve seen and heard that works particularly well is to not have just a straight handoff, but have the seller stay on to assist in transition. It’s very hard for most business owners to hand it over, say ‘I’m done’ and walk away and expect that everything goes smoothly. Find a way to have the seller work with the buyer to cover things that you may have forgotten to address.
How can a program such as Outright help the business transition?
Reeth: Outright is designed for the smallest small businesses. It’s for the business owners who are doing their own accounting and recordkeeping. We help folks get organized. The program can be used to show buyers how the business works.
This article was republished with permission from The Street.