It can be difficult for a business owner to figure out the process how to sell their business. Think about it – you’ve built a successful company over many years, weathered the ups and downs of finding customers, hiring and training employees and working toward sustainability. If all has gone well and you are one of the lucky ones who have a profitable business that produces cash flow on an ongoing basis, you have done better than most.
Now, for whatever reasons, be it health, retirement or the chance to cash in on all of your hard work, you are considering selling the business. It all starts with that simple question, “How do I sell my Reno-based business?” The answer often is you need to go out and find out what the market is like for companies of your size, in your industry and who the buyers may be.
At Sell My Business Reno, we have worked with local business owners to realize a transaction and transition in ownership for over 20 years. We know that the difference between running the day-to-day of a successful, profitable business is much different than the process of selling that same business. Knowing buyers, like private equity firms, and understanding the nuance of business valuation and how to negotiate a purchase agreement are skills that typically you can only develop by working as a business broker or in the mergers and acquisitions industry. At Sell My Business Reno, you have come to the right place.
Working with a professional firm like ours can be a wise decision and a profitable investment for you as we earn our fee as a percentage of your eventual sale price. Time and again, we are confident that our expertise in helping a business prepare for the sale, by recasting financial statements, preparing and marketing a investment memorandum, doing the research to find and contact potential buyers who will be interested in taking a look at your business, and in negotiating deal terms during due diligence, all pay for themselves by getting you an increased valuation on the sale. It can be helpful having a third party involved in your transaction when negotiations get tense, or when you need advice on a deal point that the buyers or the buyer’s attorneys initiate.
How do I prepare my business to be sold?
Step one in preparing your business for a sale is to engage a professional M&A advisor like the brokers at Sell My Business Reno. Immediately upon engaging with a firm like ours, we will begin to compile your financial statements with your help and that of your accountant. The goal of this financial review is to review the recent performance of your business, and the net income it has created. It is also important for us to highlight expenses that were discretionary in nature, so we can add those expenses back to your shown net income to create a recast, or adjusted, figure. This figure is often referred to as adjusted earnings before interest, tax, depreciation and amortization, or adjusted “EBITDA”. Private equity firms and other investors are comfortable with this phrase and also expect to quickly get a pulse on the EBITDA of a business they are considering buying.
The financial statements need to include at a minimum the last three years’ income statements, balance sheets (as well as a current balance sheet), cash flow statements, aged accounts receivable, aged accounts payable, and a list of your top customers and suppliers. The discretionary expenses we mentioned as add backs may include things like above-market salary payments to yourself or some of your employees, personal expenses that you run through the business like your car, cell phone, health insurance, and any retirement plan contributions that you make that are above market norms. If you employ your spouse or family members but they do not perform a job function that matches their pay, we will help you normalize those costs as well. All in all, the purpose is to arrive at that adjusted EBITDA figure that truly represents the owner benefit in terms of cash flow on a yearly basis. We will look at the trend of that adjusted EBITDA figure, and research the industry for current multiples being applied to businesses like yours to come up with a purchase price.
Another big thing that business owners like you can do to help prepare your business for sale, is to remove yourself as much as possible from the day-to-day operations in advance. It is safe to assume that most buyers of businesses are not looking to come in and run the business as a manager after purchase. Financial buyers may install their own management team, but typically if we are working with smaller businesses in the Reno area, those with under $1.5 million in adjusted EBITDA, the businesses are smaller and the owner is more likely to be intimately involved in running the company. Intuitively, if you want to sell the business and move on to another phase of life, it is a bad thing if you are integral to the operations, sales, or general success of the business now. As business brokers, we often see this happening with key relationships with suppliers or big customers and the owner himself or herself.
Any planning you can do in advance to transition yourself out of being so integral will pay off in making your business easier to sell, more quickly and at a higher valuation in general.
Can I sell my business for cash and retire?
This is a common question from business owners, and it is in fact two questions. First, can you sell your business fast and cash out? How much money will you get on close? Usually, you can not sell a business quickly. It takes time to go through the process we have listed out above, and we haven’t even yet gone into detail about negotiating with buyers and working through a deal to close.
Even if you get an accepted offer on your business, there remains a good chance that the sale will not happen. If you want to sell your business fast, the best chance you have is to make the price so low that buyers pounce quickly. Most business owners do not want to sell for even a penny less than the market can achieve for them! So that option is unlikely, save for a terminal situation.
How much money will you get on close? Because the total amount of money you will receive from the purchase price for your business will vary from business to business, based on the profitability and industry you are in, it makes more sense to discuss the percentage of the purchase price you are likely to receive in a business sale. Most businesses do not sell for 100% cash on close. Deals typically involve some percentage of owner carry, or a “seller note”. This means the selling owner (you) will bank a portion of your purchase price by letting the buyer pay it over time, with interest.
Sometimes this “carry” has a performance component, or earn out. This means the ultimate purchase price that you receive would depend on the performance of the business after the sale, while you stay involved. Regardless if the carry is based on performance or is more of a traditional note with a set payment schedule at a set interest rate, there is a very high chance that no matter what your sale price is, you will not get all of it one close in the form of cash.
Negotiating the Sale of Your Reno-Based Business
We are jumping around a bit here as we try to give the background on the process of selling your business, and the value of working with a business brokerage. But let’s talk a bit about negotiating the sale. Once we have prepared the CIM marketing package and had inquiries come in from potential buyers, those buyers can at any time submit a letter of intent, or LOI, to indicate their intention to buy the business and the price and terms.
It is up to you to decide if you want to accept an LOI, or push back for different terms. This point is an important point of negotiation. Let’s say the buyer submits a LOI at a purchase price of $1 million, with 80% down and the other 20% carried over 2 years at 5% interest. Your business makes $250,000 per year in adjusted net income. The business is growing. We have agreed together that the business should yield $1.25 million in a sale. With just $800,000 up front, you don’t like the purchase price or the up front cash. So, we reject the LOI.
But you like the buyer. You’ve had good phone calls and meetings to date. At this point, we can proactively let the buyer know that if they can get to $1 million up front, and another $250,000 in 1 years’ time, that you will accept the terms. After a week of deliberation, the buyer agrees to the increased price and carry, so long as you stay involved in the business for those 12 months as a consultant with $3,000 per month in monthly salary to boot. This is how negotiations go in selling a business.
Contact our Reno Office
Sell My Business Reno is standing by to discuss the opportunity to sell your business. Call our office at 775-789-3810 or visit us at 10775 Double R Blvd, Reno, NV 89521 during business hours.