Procedure for Sellers
An experienced intermediary should manage the sale process from the first day you decide to sell your business until the day you get your check. This will involve working with your other trusted advisors (your attorney, accountant and banker). There are four distinct phases, valuation, marketing, negotiation and transition.
After the required financial data is gathered, it must be recast. Understandably, many small businesses suppress profits, thereby suppressing taxes. When this occurs, their financial records do not reflect their true earning power. For example, owners of small businesses often reward themselves with benefits, which increase expenses and reduce profits. Recasting adjusts owner related benefits and other discretionary items. The result of this process is a value referred to as seller discretionary cash-flow, EBIT, or EBITDA.
Three different approaches are commonly used in business valuation: the income approach, the asset approach, and the market approach. While there are quite a few methods of determining the fair market value of a business as a going concern, the Direct Market Data Method is usually the most relevant.
Once the fair market value of your business has been determined, your intermediary should identify the target market and implement a marketing plan to stimulate interest. Prospective buyers are aggressively solicited and qualified. Qualified prospective buyers must then sign a confidentiality agreement prior to receiving any confidential information about your business.
After consulting with you, prospective buyers are individually escorted to your place of business at a time convenient for you. After initial meetings, prospective buyers are encouraged to make written offers, which you may accept, reject, or counter. Effectively negotiating purchase and sale agreements requires skills gained over many years. Experience matters!
Once agreement is reached, the due diligence process begins. Each contingency must be addressed on a schedule. Standard contingencies include financial and legal reviews, a covenant not to compete, employment contract(s), an assignment of lease and sometimes a financing contingency. After all the contingencies have been met or waived, the transaction closes and you are paid.