Entrepreneurs usually sell start-ups for two main reasons. One is to get rich and this happens when some big company recognizes their work and gives them an “offer they can’t refuse” (usually from $1 to $10 million).
Another reason is to save some of the money invested by the entrepreneur when a business doesn’t go as planned. Although we would all like to get rich fast by selling our businesses to some big corporate entity, we need to be ready for both scenarios.
This is the reason I decided to write this guide that will help entrepreneurs to successfully sell their startups, take as much money as possible and escape from the bureaucracy labyrinth that follows this process.
Step 1: Preparations
A start-up sale needs to be planned well ahead. Only lucrative and well-organized businesses can be sold for a large sum, and that’s why every entrepreneur should take a year or two to improve financial records, production process and customer loyalty, which all make a business more profitable and raise its price. Buyers want businesses that run smoothly, and can easily survive the transfer from one owner to another.
Step 2: Determining the Price
Main reasons for selling a start-up business also influence its price. If it turned out less lucrative than expected it will definitely be sold for less. On the other hand, if a company is doing well, its price will be much higher. These are some of the attributes that make businesses more attractive to buyers and increase their value:
- Increasing profits
- Loyal customer base
- Ongoing contract with some major company
- Consistent income, etc.
Determining the real price of business is very important because too high a price can turn down lots of potential customers, while nobody wants to sell low, of course. Start-up valuation can be done by a professional business appraiser. These experts also provide an official explanation of the determined price on paper, and this document can be used during sales, to add credibility to the price asked.
Step 3: Hiring a Broker?
Selling a start-up business without a broker is easy only if it is being sold to the current employee or some other trusted person, but in most other cases hiring a broker brings extra security to the purchase. It also allows an entrepreneur to continue running a business at the highest pace and raise its price for a few percent.
Brokers always try to sell for the highest price, since that way they will earn the biggest commission, and therefore hiring a broker is usually a very safe bet. Still, it is very important to choose the right broker with good credentials, lots of recommendations and several sold businesses in the niche.
Step 4: Preparing Documents
Start-up sale requires elaborate documentation from the company’s accountant that should include both financial statements and tax returns. In addition to this, lists of all equipment that goes with the company should also be provided to the broker.
If a company owns its office space, it also needs to provide the documentation of office premises. All these papers should be copied and included in the presentation that can be handed out to the most serious buyers. This presentation should also include a short business running manual and a few articles that explain all of its benefits and future market trends in the niche.
Step 5: Waiting for a Call
Business sales can last longer than expected. In most cases, this process can last from six months to up to two years. When the phone starts ringing it is very important to be in contact with all the buyers, and not to dismiss the ones that seem less serious.
Having several potential buyers saves you from faltering deals. The background of all buyers should be checked, as well as their financial status, before giving out more elaborate information about the business that is being sold.
Step 6: Making the Deal
Although every deal can be negotiated, entrepreneurs should always stand firm on the asked price, especially if it is reasonable and if they have an appraisers’ assessment to prove that. The broker and the company lawyer should always be free to do their business and, if necessary, some additional experts or agencies can be hired to help with certain parts of the offer.
Since conveyancing is one of the most difficult processes when it comes to sales that include office space, it is advisable to hire agencies that assist in real estate purchases, such as Think Conveyancing.
When the deal is sealed, all agreements should be put in writing, including the confidentiality papers that will protect entrepreneur’s information. Some of the most important documents that need to be signed at the end of the purchase are a bill of sale (that transfers the assets), a security agreement, a non-compete agreement etc.
Selling a start-up business is a long, hard and sometimes very emotional process. Depending on the reason for sale and the agreed price it can be more or less enjoyable, but the important thing to remember at this point is that every business requires certain conditions and if you are not able to secure them, selling it is the best thing you can do.