What You Need to Know Before You Sell Your Business

file0001658617775The baby-boom generation includes Americans born between 1946 and 1964. Millions of baby boomers are now at or approaching retirement age, and many of those who are business owners are looking to sell their companies. As noted in a recent article in The Colorado Springs Business Journal, the Market Pulse Quarterly Survey Report from the fourth quarter of 2012 indicated that the retirement of baby boomers was noted as the top reason for selling a business for the first time in history. Moreover, the mass exodus of baby boomers from the workforce is expected to cause a 35-percent increase in sales of businesses by the end of 2013. In fact, many of these folks might already have sold had it not been for the recession of the late 2000s.

Business owners have spent a lifetime pouring their blood, sweat and tears into the growth of their company, so the last thing they want to do is to sell their business short. With the economy looking better, business owners are now ready to sell, but what can they do to prepare and ensure maximum gains? There are several checklist items to attend to, including the following: 

  • Be sure that financial statements have been prepared according to generally accepted accounting principles (GAAP) for at least the last three years.
  • Generate forward-looking financial statements for the next two to five years.
  • Research the market for comparable businesses recently sold.
  • Focus on profitability and growth to obtain the highest multiple.
  • Keep organized records that will be pertinent to prospective buyers.

Most of all, remember that timing is everything, particularly when assessing the value of a business. If a business is sold during the first quarter, the company will typically be valued on the financial statements from the entire previous year.  Conversely, if a business is sold anywhere from the middle to the end of the year, the value will be based on an annualized projection by prorating the year-to-date financial performance. Either way, a standard multiplier—often between three and five—is applied to the earnings before interest and taxes (EBIT) to appraise the total value.

Timing is also a consideration when making the actual sale. A business can be sold at any time, but typically, selling at the end of the year is more difficult, since potential buyers are usually too busy closing their books and performing other year-end procedures to get serious about a purchase. Because both retiring and selling a company can be emotional for the owner, the best course of action to take is to consult with an expert who can be objective and steer you in the right direction.