How do you sell a business?
It’s a tough question for many business owners, and one that they find themselves asking inevitably. Whether it is brought on by age, health, retirement, divorce, or economic circumstances, selling or transitioning the business to different ownership is something every business owner must face.
Often, the savvy and successful business owner comes to realize that selling a business is much different than owning a business and running its day-to-day operations. Producing a profitable cash flow and servicing your customers requires a skillset unique to your business – and it is a skillset that you no doubt possess. Selling a business, however, requires a completely different expertise and background.
For over 20 years, we’ve helped business owners in the lower-middle market and on Main Street across Wisconsin sell their companies to new ownership. Transitioning to new owners is an arduous process, and one that often requires working with a professional group of business advisors. In addition to working with a group like the bankers and business brokers represented here on Sell My Business Wisconsin, you should plan on consulting with a mergers and acquisitions attorney, a tax attorney, and a certified public accountant (CPA) in the greater Wisconsin area.
The Process of Selling a Business
“Can I sell my business?” The answer is yes. Business owners are often surprised to learn that less than 20% of businesses that go up for sale successfully transfer to a new owner. Those are not good odds! You can ensure that you are one of the owners who sells for a good multiple to new ownership by doing a few things right. You may sell your business fast with an asset sale, or find that a stock sale is more appropriate so you can pass along any risk or liability tied to the entity in the sale. Regardless, the process all begins with a conversation.
The process of selling your business begins with some internal questions. First off, do you want to sell? Make sure the decision is thought out and considers factors like the general economic climate and the current health of your business. The easiest way to get a head start in selling your company is for it to be a consistently profitable business. Have you been earning a consistent stream of revenue and profits in recent times? Buyers like to see a healthy business with a diverse customer base and a strong bottom line. After all, who wants to buy a failing business? We get calls from struggling business owners all of the time, and it is a hard situation to work with if the business is declining and the competition is beating the business at every turn.
Assuming you want to sell and have a profitable business, the true process of selling a business begins with a valuation. Professionals like our firm here in Wisconsin need to get to know your business and to make an assessment of the financial value of the business as a whole. This is called a business valuation. In order to complete a business valuation, we must collect information on your company like your recent financial statements (including income statements, cash flow statements, balance sheets) and the last 3-5 years’ tax returns. It is a bonus if these tax returns have been reviewed or completed by a professional CPA.
How Much is My Business Worth?
It is via the business valuation that we find out a general estimate of the value of your business. We will take your financial statements and sit down with you to work through a recasting of the financials. Recasting, which is sometimes referred to as adjustments or adjusted EBITDA, is a process of normalizing the financial statements of a business that is looking to sell. When you recast your financials, the goal is to present financials that more accurately show the true owner benefit, financially, that the business provides.
For example, many small business owners “live inside the business”. They intentionally look to minimize their tax exposure and show a lower net income by paying for things through the company account that support their lifestyle. Common examples of these expenses include:
- Health insurance for family members
- Personal auto expenses (car payment, car insurance, gas)
- Personal travel
- Retirement account contributions beyond the ordinary
- Salary or employee pay for family members
- Non-recurring or one time expenses to the business
- Any rents or payments for services made above the fair market value for those services
- Discretionary or one time charitable donations
- Excessive repairs or maintenance to real estate, particularly owner-owned or company-occupied property
All of these expenses represent common add-backs to net income. To arrive at an adjusted EBITDA in a recasting situation, we simply take the total or the reasonable percentage adjustment from these expense categories over the past few years and add them back to net income. The end result is a more accurate portrayal of owner benefit or adjusted net income for the business. Any multiple that is applied to the net income of the business to arrive at a market purchase price is multiplied off of this number.
On the topic of multiples, many business owners come to us and ask the aforementioned question of, “What is my business worth?” The recasting of financials and applying of an industry-standard multiple is the most common method of arriving at this value. A “multiple” is a value that is multiplied to net income to arrive at a purchase price. The purchase price is often expressed or derived this way as it should reflect the expected earnings over time that the buyer is willing to purchase.
An Example Business Multiple and Value Scenario
Consider a business that is making $500,000 in net income. We recast the financials to show the business has a true owner benefit of $600,000, by adding back $75,000 in over-market owner salary, and $25,000 in other non-essential expenses. The business is in the software industry. As business brokers and bankers who know the Wisconsin market and have worked with software businesses, we know from recent transactions in the market that businesses of this type are selling for a 5 times multiple.
Simple math of multiplying the 5 multiple by the $600,000 in recasted net income gives us a purchase price of $3,000,000. (*Had we not recast the financials, we would have produced a business valuation price of $500,000 x 5, or $2,500,000.)
Putting Your Business on the Market
Now that you have a basic understanding of how to value a business, let’s talk about what happens once we have the valuation complete and agree on a purchase price to take the business to market. Any good banker or business broker earns their keep at this phase. Think of how you would sell a house. You’d hire a real estate agent. The agent would prepare marketing materials, do diligence on recent sales in the area of comparable properties, discern a value, and put the home up for sale on the multiple listing service, or MLS. While there is unfortunately no MLS for businesses, there are established marketplaces and buyer lists that good brokers maintain.
We will create a confidential investment memorandum (or CIM) that is a quick snapshot of your business to show to potential buyers. This CIM will include:
- Background and history of the business
- An explanation of the services you provide
- A redacted list of your customer breakdown and % of sales
- A list of key employees by job function
- Any patents or proprietary knowledge, tools, or software that the business owns
- Your last 3 years’ financial statements and tax returns
- Adjustments to the financials to show an adjusted EBITDA
- Valuation expectation (or Purchase Price)
With this CIM in hand, we will begin to talk to potential buyers by pinging our buyer list of investors and private equity firms. Depending on the size of your business, we will also list it for sale on marketplaces like BizBuySell.com. Buyers often visit these websites to prospect for new acquisitions.
How Do I Negotiate with Potential Buyers?
Once the CIM is circulated, we will evaluate potential buyers for your business by first making them sign a basic non-disclosure agreement (NDA). Once this is in place, we can freely speak with potential buyers about the details of your business without fear of exposing any trade secrets or information that competitors would benefit from learning.
This period is like dating. Expect to do several phone calls with potential buyers as they evaluate and learn more about your business. Your business broker will be on these phone calls and help to facilitate the process and answer questions. It is up to you to decide which buyer is the best fit for your business. It can take several phone calls and multiple in person meetings or site visits to begin to feel comfortable on both sides of the table in a business sale. Buyers will like to get to know you and see your operation where possible.
Once a buyer has made a full assessment of your business, we will solicit for a letter of intent (LOI). The letter of intent is a formal offer from the buyer to acquire the business. It will include a purchase price, terms and sources of funds, and outline the due diligence process that will lead to closing. It is up to you to decide if you will accept the LOI or reject it. Once accepted, the signed letter of intent is a signal that we have an agreement in principle and due diligence is to commence.
Most business transactions require several months of due diligence before closing. During this time period, expect to dedicate a significant amount of time to providing information and answering questions about the business, customers, services, and the upcoming transition after the sale. Your attorney and CPA will be invaluable during diligence, working alongside us as we negotiate the purchase agreement and final terms of your deal. The buyer may order a quality of earnings report to be done by their accounting firm (or a third party), which means your financial statements will be audited and verified for accuracy by this CPA firm. It’s all part of the process. In the end, hopefully we’ve worked towards a successful sale of your business and you get a big check.
Contact Our Firm
Now that you have a basic understanding of what it takes to sell a business in Wisconsin, feel free to reach out to our firm for a free initial consultation. We have worked with clients across the state, in Milwaukee, Green Bay, Madison and Eau Claire to sell their businesses. Industries include software, heavy machinery, retail, antiques, commercial printing, wholesale distribution and several professional service categories. Call us at 920-965-4034 to speak with one of our partners in the office today.