Using a Business Broker to Sell a Business
Before you sell a business, you may decide to work with a business broker once you obtain your business valuation. In the first place, a business broker will help you focus your time on managing your business why he/she works on selling it for the highest price. Here are some pros and cons of using a business broker to sell a business.
Advantages of Using a Business Broker to Sell a Business
- Help Valuing the Business. A business broker usually has a lot of knowledge about what businesses are worth.
- Help Marketing the Business. A business broker can market the business in a manner that is attractive to potential buyers.
- company Much like a real estate agent, a business broker knows how to attract potential buyers.
- Confidentiality. Often a business owner wants to keep the sale of the business confidential. A business broker can make sure competitors, employees, suppliers, and others are not made aware that the company is up for sale.
- Evaluating the Intent of Buyer. Business brokers can weed out buyers who aren’t really serious or qualified to buy.
- Ability to Convert Interest in Buying a Business into an Actual Sale. Business brokers can help to create competition among potential business buyers, making suggested changes to an offer so that is it more likely to be accepted.
- Service as an Intermediary. A business broker can act as a middleman between a buyer and a seller.
- Expertise in Business Sales. A business broker knows all the required details to successfully close the sale of a business.
Disadvantages of Using a Business Broker to Sell a Business
- One-Sided Interest. A business broker typically represents the seller. As a result, the broker’s interests do not take into consideration what may be in the best interest of the buyer.
- The Broker Fee. A business broker’s fee is usually based on 6-10% of the business sales price. Depending on the cost of the business, this can be a hefty fee.
- Competency of Brokers Vary. Make sure you find a business broker with experience and a good reputation. It is not uncommon to see people with little knowledge or expertise representing themselves to be a business broker.
- The incentive to Sell Low. Since a business broker gets paid their commission when there is a sale, there may be an inclination to undervalue a business to sell it quickly. For example, the difference between selling a company for $400,000 versus $500,000 based on a 6% commission is only $6,000. On the other hand, for the seller, it’s a difference of $94,000! Keep this in mind.
Obtain a Business Valuation Before Your Sell a Business
First and foremost, obtain a business valuation, so you know a reasonable price to sell your business. In the event you don’t know how to value the company, you may need to talk with an accountant. Keep in mind, many different methods can be used to evaluate a business. Before you sell a business, take time to make sure all your business procedures are clearly defined, and there are successful systems in place. These essential steps will maximize your business valuation.
- Using Market Approach – The foundation of this approach is that the more money a business makes, the more it is worth. In this regard, there is a high demand for a profitable business that has few assets.
- Using Adjusted Net Income – The value of a business can also be based on the adjusted net income of the company. The Adjusted Net Income is a figure that includes business profits and the owner’s salary. However, this figure also includes all other cash-related benefits such as health insurance, company care, auto insurance, gym memberships, etc. which the principals enjoy.
- Using Multiplier Method – The multiplier of adjusted net value values the business based on behavior in the market. In this instance, you can calculate the business value based on what people have paid for similar small businesses. A low-risk business with high market demand could have a higher multiple than a business where a buyer assumes higher risk. A lower multiple could be due to a business with lower market demand. On the other hand, a highly sought-after profitable company could have a price of four times the business annual net profit. More commonly available businesses, such as restaurants, typically have a sales price based on a one or two “multiple” because these types of businesses are often available for sale. Supply and demand of a particular industry can have a direct correlation to the multiplier used to value the company.
- Terms of Sale Affect Business Value – The selling terms often affect the calculation of the business sales price. For example, when a seller demands all cash, they may only receive 60% to 80% of their asking price. This is in contrast to a potentially higher amount a buyer would have been willing to pay with a down payment and the ability to finance the balance. Creative business purchase terms usually result in the seller getting a higher price for the business as well as a faster sale.
Lastly, speak with a tax advisor so you will know the best time of year to sell your business. In addition, create a budget so you know precisely how each profit obtained from the sale of your business will be utilized.
Documents Required to Sell a Business
Once you have a willing buyer, the step in selling your business in California is to draft a letter of intent. The letter should address the preliminary purchase price (the final sale price will industry through negotiations), the scope and structure of the transaction, confidentiality between the parties, and a mutual obligation for both parties to act in good faith.
Once you and the buyer finalize negotiations, the seller must create a contract that outlines the terms of sale and complete the buy-sell transaction. Depending on the type of business you are selling, you may need an Entity Sale Agreement or an Asset Sales Agreement. Furthermore, if you are financing part of the purchase price, you may need a Security Agreement for Asset Sale, a UCC Financing Statement and a Promissory Note. Sometimes the seller will need to sign an Assignment of Lease or other Contracts. Moreover, the buyer may want the seller to sign a Covenant Not to Compete. These documents can be prepared for you with the help of A People’s Choice. Finally, sellers usually need to provide an accountant with a copy of business tax returns and a list of all company equipment, assets, and debts.
Contact us today to find out more about the legal document services we provide to business owners looking to sell their company. We can show you how to save money and protect your business throughout the process. Call us today at 800-747-2780.
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