Most business owners have spent a huge part of their lives investing in and growing their companies. Managing an LLC or corporation can be difficult and it requires a lot of hard work and dedication. The same goes for getting one ready for sale, especially if you want to capture the best valuation. But sometimes, the economic landscape required to accomplish the latter may be weak, adding additional stress to any potential sale.
There are many reasons why someone may choose to sell their business, and some of these reasons do not offer the luxury for a business owner to hunker down and wait out a weak market or down economy. Waiting for the conditions of a struggling economy to change and working until they do so may not be feasible if your business is under debt and struggling due to the slow economy. Moving forward and preparing your business for sale may be the only option, and there are some steps that you can take to maximize a successful sale and capture the full value of your life’s work.
Getting Ready to Sell Your Business
The outbreak of the COVID-19 pandemic has greatly affected markets and businesses around the world. Tens of thousands of businesses have been forced to close their doors and shut down, causing great financial hardship and resulting in the loss of millions of jobs. Many businesses that thrived a year earlier are now struggling for survival. Whether you have fallen victim to the effects the coronavirus has had on the economy, or simply feel that now is the time to sell and move on to a new chapter of your life, there are several key steps that need to be made before moving forward with selling your business.
- Know what your business is worth. Besides all the work you may have personally invested in your business, your company has a numerical value that is the culmination of all of the assets that you are including in the sale, minus any liabilities that the business may still carry. In addition to these assets, the revenue the business generates must also be included in this valuation. Find a good business appraiser that will help unlock the value of your LLC and help price your business.
- Determine your marketing angle. If your business is in debt or sales have dried up, you'll need to think creatively about how to value and market your business to a potential buyer. It may be physical assets your business owns, such as building or equipment, or it could be valuable patents, a desired web domain or a highly coveted list of clients and suppliers. These benefits may outweigh the unprofitability of your business to a buyer.
- Gauge buyer interest. If you have been in a particular business for a number of years, odds are you have a pretty good handle on who your competition is and if there are any new players in the industry. Keep your eyes and ears open and know what your peers are up to. Just because you plan on making an exit doesn’t mean that they are too. The sale of your business may offer an opportunity for their business to expand or open the door for someone else.
- Get your ducks in a row. Selling a business is a lot of work, so put your A-Team together. Talk to your accountant, tax advisor, financial planner and other professionals to help ensure a smooth and successful sale. Consider using a broker with experience in selling businesses; they can typically find more potential buyers than you can yourself. Have all your documents and records in order and include any balance sheets, P&Ls, tax forms, business receipts and closing paperwork. Prepare your Articles of Amendment paperwork, which will report changes in ownership to your Secretary of State.
- Establish the right mindset and temper your expectations. In an ideal market, you may be entertaining multiple bids and receive competing offers, but 2020 has proved to be a tough year in many business sectors. Know the number that works for you and take every opportunity to promote the business that you worked so hard to create.
Selling a Business in Debt
Carrying debt is part of doing business. Many businesses accrue debt during key periods of the life of their business. A healthy business can manage its debt, as long as revenue is coming in to cover the costs of the loans and hopefully pay them down. But in many cases, businesses that carry the heavy burden of expenses that surpass their revenue must accept the reality that they are operating a failing business.
Many business owners are experiencing financial hardship as a result of COVID-19, declining markets and the inability to raise capital. The pandemic has exacerbated business losses and led to a national unemployment rate that reached as high as 14 percent. Unlike a seller who is looking to move into retirement, these business owners may have no other option but to let go of their dreams of being a business owner and move on to some other opportunity. A number of these businesses may be burdened with so much debt that they would complicate any potential sale and possibly turn off buyer interest. Though this situation is taking place around the country, there are a few scenarios that can play out when a business owner wants to sell an LLC burdened in debt.
- Selling at a Discount: Depending on how motivated the buyer is — and how deeply discounted the sale price of the business — the buyer may decide to take on the debt of the business, especially if they feel that they can turn the business around. This all depends on how much is owed and if the business has the potential to earn revenue that exceeds the liabilities and enter profitability.
- Selling Business Assets: The seller may opt to just sell company assets, including equipment and inventory, and use the money to pay down the debt while still owning the business. This option may be employed if the owner still wants to own the business and feels that things will turn around in the business landscape.
- Paying Down Debt: One way to make your business more attractive to a potential buyer is by reducing the level of debt. Options can include renegotiating terms or finding other lines of credit with lower interest rates. Also, if you are still on the fence about selling your business, you should look into government grants and loans, including disaster-relief assistance if your business was affected by the pandemic.
- Using Sale Proceeds to Pay Off Debt: A contingency may be added to your business sale, which allows you to pay off your business debts using the profit from the sale of the business. This will clear your debts and allow the buyer to take over the business without any outstanding obligations.
Getting Professional Help with Sale Paperwork
If you are planning on selling your business, consulting with a professional can provide you with the clarity and direction you need. For support in selling your business, consider going to a company that has the right expertise and has helped start thousands of businesses. Incfile can help you with the paperwork needed, such as Articles of Amendment to transfer ownership, and get you on your way to selling your business.