What does your exit strategy look like for your business? Whether you plan on buying or selling a business, it’s never too early to start preparing.
It can take several months to prepare a business for a sale, so if you want to get the best price and terms, you should understand the ins and outs of the business valuation process before you get started.
Keep reading for five secrets to buying or selling a business for the best price and terms.
1. Build the right team for your business sale or purchase
As most business owners know, a strong team can maximize your profits. We learn to hire people who are smarter than us to streamline operations, build profitable products and deliver unparalleled customer experiences.
The same goes for preparing your business for a sale, or acquiring another business. A proper business sale requires a wide range of advisors and experts, including, but not limited, to:
- Commercial lenders
- Business valuators
- Business attorneys
- CPAs
- Financial planners
- Business brokers
- Exit planning experts
- Estate lawyers
- Commercial real estate advisors or brokers
Business buyers and sellers shouldn’t make assumptions about which advisors are right for their deal. Rather, they should interview several different advisors to find the right fit for their unique situation.
Ideally, business buyers and sellers will identify advisors who understand their industries and business size, among other key characteristics.
Doing your homework and spending quality time interviewing and identifying advisors can also help you find advisors who have the right connections to get your deal done on the best terms.
2. Start the business valuation process early
A business valuation isn’t a one-and-done kind of project. Rather, a proper business valuation should be implemented during specific periods of time. Often, a business valuation will be conducted privately when the owner(s) first decide to consider selling, and later after the owner(s) make the necessary changes to get the best price and terms for their sale.
The second time around may occur privately by the sellers again, or by the buyer through their lender, for example.
As you can see, the business valuation process requires planning and patience. That’s why an early valuation is so critical. When starting sooner than later, a business valuation can identify value gaps that you and your team can correct to maximize the sales price.
3. Buying a business? Don’t rely on the seller’s appraisal
If you’ve ever purchased a home, you know the importance of getting an appraisal before submitting your offer in order to get the best deal possible. Business appraisals are just as important for buyers interested in purchasing a company.
Competing appraisals may prevent buyers from overpaying for a business by using the seller’s “hired gun” appraisal. Remember, the appraiser has duties to its client only — not to other parties in the deal. So, it’s in a buyer’s best interest to hire their own appraiser as well.
Money-Saving Tip: If the buyer is looking to finance the deal, then they will need to order an appraisal through their lender to avoid paying for an appraisal that the lender will not use. A lender will not accept a seller’s appraisal for funding purposes.
4. Selling for more than $5 million? Be aware of the SBA’s requirements
The Small Business Administration (SBA) only lends up to $5 million, so deals with larger sale prices will require cash, conventional lending, seller financing or other methods if the buyer wants to leverage an SBA loan.
The SBA also has very specific requirements for who it will lend to, what types of collateral is required, and the rules around seller earnouts. Buyers and sellers alike should ensure that they know these rules in the beginning of negotiations if the assumption is to fund with SBA-backed loans.
5. Work with business valuation experts you can trust
Building on Secret #1, it’s so important to hire a business valuation team that you can trust. Ask each advisor for their credentials, case studies and industry experience before signing contracts with them. They should understand everything about the type of business you’re purchasing or selling to position you for short-term and long-term success.
The business buying and selling processes can be lengthy and complex, so it’s also important to hire a team of advisors that align with your working style and schedule. Synchronizing your working styles and schedules can make for a smoother buying and selling experience, benefitting all parties (you, most importantly!) in the long run.
If you’re interested in buying or selling a business, send us a message to learn how we can support you in getting the best price and terms possible. Our business attorneys work hand-in-hand with trusted business valuation experts so you can get the most bang for your buck.
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