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10 Questions to Ask Before Selling Your Business

Selling a business should never be a spur-of-the-moment decision. Here's what you need to think about to figure it out.
/ Source: Entrepreneur.com

If you’re thinking about selling your business, think twice. Selling a business should never be a spur-of-the-moment decision, says Curtis Kroeker, group general manager for San Francisco-based BizBuySell.com and BizQuest.com, business-for-sale marketplaces that have an inventory of about 40,000 businesses. "You need to figure out things like if you should sell, when is the best time to sell, and what you need to consider before selling, among many other considerations."

So, should you sell your business? Here are 10 key questions to help you figure it out.

Is my business ready to sell? Kroeker recommends at least two years of preparation before putting your business on the market. Make sure you can produce two to three years of tax returns that are accurate and show maximum profitability to get the best price for your business, he says. "You can't start putting things together the month before you sell."

How is a buyer going to value my business? Particularly with family ownership, companies sometimes run everything through the business, such as country club dues and car allowances, says Robert Kibby, section head of the corporate and securities group at Dallas-based Munsch Hardt Kopf & Harr Attorneys and Counselors. "Loading the business with tax write-offs can make you appear less profitable and cause a buyer to undervalue your business."

Who should be on my team when I sell? It's important for entrepreneurs to figure out whose services will bring them through the sales process and help them get the best price for their business. Do you need an accountant? How about an appraiser, attorney, consultant and business broker? "The buyer is typically going to have a good team to go over your business, so you should, too," Kibby says.

Is it the right time to sell? Many people wait till their business is on the decline to sell. That's the exact opposite of what you should do, says Debbie Allen, a Phoenix-based business and brand strategist and consultant. "You want to sell when you are at the top of your game – peaked out," she says. "Some will say, 'I'm making good money now. Why should I sell?' That's thinking like a business owner, not an entrepreneur."

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Is the market right? Before selling, look at current market conditions for your industry. Selling a home improvement business in 2006 showed a pretty good return. Fast forward a couple of years and many roofing, siding, home financing and other housing-related companies had lost a big chunk of their value. "I saw companies who turned down an offer in 2005 who couldn't get three-quarters of that price a few years later," says Allan Siposs, a managing director of FMV Capital Markets in Irvine, Calif., which offers services for mergers, acquisitions and divestitures. "Wait until market conditions are better to sell."

Can I cope with the changes on the horizon? Rapidly changing technology, increasing globalization and other business trends can prove too much for some business owners. Keep your eyes trained three or four years down the road, and if you don’t believe you can keep up, sell before your failure to adapt catches up with you. "Some people find it hard to leave, but if you wait too long, the industry may pass you by," Allen says.

Can my business thrive without me or without a key customer? If a buyer is concerned that a business is too dependent on the owner or a single customer, he may take his offer elsewhere. "A good business can operate when the owner is on vacation and has good revenue diversification, where no one customer represents more than five percent of the business," Siposs says.

Would I be willing to stay on if the buyer wants me to? Sometimes you can seal a deal by agreeing to stay on in a consulting role for a period of six months. But first, you need to determine whether it's really worth it to you. If you're willing to stay on, it might reduce the risk to the buyer and increase the value of the company, Siposs says.

Related: Start Now to Prepare to Sell Your Business This Year

What are the potential deal breakers? Unresolved issues can rear their ugly head and interfere with a sale, particularly in areas such as company ownership, accounting and intellectual property rights. For example, an owner may have used a contractor to write software for the company without requiring him to assign his rights to the company. “This can create questions about who possesses critical rights, which can scuttle the deal,” Kibby says. So, consider what your potential deal breakers are and try to resolve them before you’re near to closing a deal.

Would I consider alternatives to an outright sale? If an outright sale isn't right for you, a CPA or investment banker can help evaluate other options. How about structuring a deal to pass on the ownership to employees through an Employee Stock Ownership Plan (ESOP)? Would you consider selling a percentage of the company to a private equity fund? Or would you do a leveraged recapitalization, which is a loan that puts a portion of the proceeds in your pocket?