Selling a small business

[MTCInc]

First off, I should say I am not yet ready to do this.. I am thinking maybe in 10 years or so.

With that said, does anyone have any input on how something like this would work? And, how is a business valued? I have read one years sales, but that's all I have heard.

Just some things I have thought about: Perhaps hire the prospective buyer on, maybe 2-3 years before selling, get him all up to speed on how things are done, meet the clients, get the feel for how we do things, etc... , and then make the transition?

But, who is going to have that kind of cash laying around to buy a business? I am a micro business, and my annual sales are in the 400k range, but I am having a hard time believing someone will have that kind of money to put up. Would love to hear some input from anyone who has any experience with this

 

[JontreeHI]

I've known a couple of guys who did exactly what you said, 2-3 years, client intro etc, then make payments of X amount to the previous owner until paid. Sounded like a good gig for the owner to me, retirement and money coming in.
Not sure if or how much was out down.

 

[JontreeHI]

Put down

 

[evo]

My dad did this. He set up the business to sell to he top employee. The basic terms were 10% of gross monthly, or a min payment of X. It worked really well.

 

[Tree Pete]

My wife and I bought the family business from my mom and dad in 1999. We did the lease / buyout option over 5 years. We paid them monthly and half their insurance. Worked out better for my parents, as in the end I ended up replacing most of the equipment, but the solid client base remained intact and still does to this day.

 

[Reed2179]

My wife and I just finished buying a business I have worked in for 17 years and run as VP for the last 5 years, my wife has done all our HR/AP for 7 years. I did a ton of research and consulted with three key advisors; a financial planner, service business sales firm, and a small business attorney. I am/have dealt with similar stuff Tree Pete mentions. The real benefit for our situation is we made the soup- what I mean is we paid the bills, sold the work, hired the guys, and made the numerous other biz decisions over the last 10 years. We used a valuation of 4 times average net profit over a ten year term. We did a stock purchase (not my preference) in lieu of an asset purchase. I could write you a book about the whole ordeal but, would rather stay brief. PM me if you’d like to ask specific questions.

 

[earthandarbor]

In my opinion, if you want to sell a business you need start organizing the business now to run without you. There is a fella around here with a fairly successful business who has been trying to sell for the last 5 or 6 years, but no luck. I think his problem is that the person purchasing the business would just be buying blue sky, meaning they would get some beat up equipment and not much else. The problem is that he is his business, he is the only one who talks to his clients, he is the only one who has a rapport with his clients, without him the business would fall apart. I have always thought that my business would be ready to sell when I can take off to Hawaii for a month and the business would be just as stable when I get back.

 

[treehumper]

x2 what earthandarbor and Reed said. Understand how an objective business valuation is done. Anybody who buys it "at arms length" will do one at some point in the process. Build it with the end result in mind, you and the business as separate entities. As you grow, move out of the various roles you may have assumed. Admin, sales, operations, etc...

Anybody buying a business is expecting there to be a loss of clients due to the relationship with the current owner. Look at what Bartlett and Saveatree do when buying a small business. They keep the owner around for 2 yrs. During that time they're building their brand with the client to reduce the number that leave.

 

[Reed2179]

Another part of the planning is taxes. What can be done with the money you'll get when you sell? Are you going to recapture any deductions you took in previous years (Sec.179)? Many times it benefits the owner to stick around from a tax perspective too.