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Small Business Sale - Putting a Small Business up for Sale - Determining the Value of a Small Business for Sale

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Starting a small business can be an exciting experience. It can be easy to get wrapped into a business startup and thrilling to make that business a success. Some people, however, find that once the business is in full-swing and running smoothly, they lose the interest they once had in it. Other people thought simply decide it is not right for them, and yet others are looking for a change after running their small business for years. No matter what the reason, there is more to selling it than just listing the small business for sale. There are several factors to consider when selling a small business. It is not like selling a car or even a house. Following a few simple guidelines will allow you to get the most out of your small business sale.

Planning is key in selling a small business. Studies show that it takes small business owners from two to four years to complete the sale. This is not something that should be done on a whim. It is a serious decision that requires following a few time-consuming, but logical steps.

Determining the Value of a Small Business for Sale

A small business sale requires preparation. The first step in the sale is to determine a value of the business. This will be the number one question of potential buyers. They may not come out and say it, but they are certainly thinking, “How much is this business worth?”

Several methods exist for determining value. The first method is to base value as a factor of annual sales. Each type of industry has a multiplier to determine value based on sales. The multiplier is further adjusted based on the growth rate and risk factor.

The second valuation method for selling a small business is the ability of the business to generate profit. Earnings or cash flow is often projected over a course of time, somewhere around five years, to determine the value of the business.

A third method used to determine the value of a small business is through the value of the assets of the business. This is the most common way to value a business with a negative cash flow. It is rarely used to value a profitable business.

Preparation for a Small Business Sale

Before listing the small business for sale, it is recommended to put all of the business’ financial documents in order. This includes budgets, balance sheets, profit and loss statements, and employee records.

Buyers will want to see financial statements first and foremost. They will want to go over past and present financial statements so they can predict where the business is at and where it is heading. The exception to this rule is in the case of strategic buyers who are either buying the business to eliminate competition or to expand the products or services into a business they already own. In these cases, they will be interested in employee situations and product history, and possibly intellectual rights and assets, such as patents or copyrights.

Selling the Small Business

Once the business has been valued and all the documentation has been prepared, it is time to market the small business for sale. Potential buyers can be found privately or by using a broker. Many people find that using a broker is a more efficient use of their time.

Once buyers are found, they should be screened. Many people who present themselves as buyers either do not have the money, the financing, or even the desire to buy the business. Some of the buyers may be competitors just trying to get as much information out of you about the business in order to improve their own without buying.

Once a suitable buyer has been found, it is time to complete the sale. This is, hopefully, the most satisfying part of the small business sale. This aspect is very similar to selling a house. You will most likely be working with a financial institution lending the buyer the money. It is still possible for the sale to never close for several reasons, but with a little luck, everything goes smoothly and you can begin the next step in your life.

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