When valuing a business an intangible asset exists: goodwill. While you don’t see or touch goodwill, it exists in many businesses, especially businesses with longevity. Goodwill may incorporate the customer loyalty built by the business, but in today’s world, goodwill also includes valuable properties such as favorable government contracts, copyrights, patents and even domain names of considerable value. All these things increase the potential earning power of the business and must be accounted for when setting the value of a business.

Of course sellers want payment for the goodwill built into their business. Unusual or lucrative copyrights and patents which make the business unique or simplify processes certainly offer value to the buyer. Sellers should carefully explain the value of these intangible assets since buyers tend to place value only on tangible assets. The buyer considers the cost of starting his own business when valuing an existing business. So if a good portion of the price of an existing business involves goodwill, the buyer must understand why the existing business provides a better opportunity.

The bottom line: Both sellers and buyers should be aware of goodwill. The buyer should understand the value of these intangible assets. The seller should carefully value goodwill so that it offers a realistic value for the price.

You set a realistic sales price, your business received a much needed sprucing up and you understand the tax consequences you incur when selling your business. Now let’s go find a buyer!

Finding a Qualified Buyer

A successful business broker provides an excellent source for finding potential qualified buyers. Business brokers assist in advertising your business and finding potential buyers. You too should put out the word in as many different ways as possible. Tell friends, employees and customers that might have an interest. Newspapers, business trade publications and web sites that offer businesses for sale all hold the potential of bring a buyer. While all these sources get the word out, a good business broker knows how to qualify and prepare the right buyers for a sale.

Be Prepared for Negotiation

Each buyer presents special needs and possible special requests. Be prepared with opportunities for financing at least a portion of the sales price and possibly accepting a lower down payment or the pay off of the down payment in installments in exchange for a better asking price. The buyer may not want to purchase all assets of the business or may want to purchase assets you weren’t planning to sell.

Document the Sale Terms

A sales agreement documents the terms reached with the buyer, providing all the agreed upon terms. The sales agreement should include the sales price, payment terms, a list of all assets and liabilities of the business to be included in the sale and what constitutes a default in the contract. Include a list of all contracts and leases and the terms of assuming each. Seek the advice of a competent business attorney, ensuring the sales agreement is reviewed for covering all your bases and legally binding.

Closing

The closing meeting transfers your business to the buyer and the agreed down payment to you. Provide complete inventories, copies of leases and contracts being assumed, contact information for employees, lessors and employees, customers, keys, alarm and safe combinations and a myriad of other information the new buyer needs to successfully run his new business. The buyer’s success secures full payment.

File Paperwork

Depending on the type of entity you sell, you may need to file documentation with your county or state. Also complete IRS form 8594, Asset Acquisition Statement, with the buyer and file with your tax returns for the year of sale.

Today’s economy demands those selling businesses be savvy and carefully do their homework before putting their business up for sale. The good news; just because it’s more difficult to sell a business in a slowing economy, it’s certainly not impossible.

Understand Tax Consequences

Probably the biggest favor you do for yourself involves understanding the tax consequences of selling your business. Taxes wipe out a huge gain when a business sells, so the owner best seek advice of an accountant years prior to actually selling a business. Your accountant may offer tips for lessening the tax bite.

The legal entity you choose for your business impacts the tax consequences and whether you sell the entire entity or merely the assets of the business.

Set a Realistic, but Negotiable Price

Pricing a business offers a conundrum because the owner wants every penny he can get for the sweat he’s put into the business; and the buyer wants the business as inexpensive as possible. If the seller prices the business to high, potential buyers may pass the business by without a good look; if the seller prices the business too low, he loses money.

Various methods exist for pricing businesses and using a combination at least for comparison usually works the best. First, look at the fair market value of the business assets, pricing them as belonging to a going concern versus a fire sale. Add a fair price for Goodwill built into the business which benefits the buyer. Compare these combined figures with comparable businesses for sale in your region and possibly make up or down adjustments. Some derive business based on a profit ratio over a period of years, such as five times net income. Again, the best approach looks at each of these pricing factors and takes a overall view for developing the sales price. Leave some room for negotiation.

Curb Appeal

A good outward appearance sets the tone for the sale. New paint, trimmed and spruced landscape, fixing the broken items ignored over the years adds value. Remember, what the buyer sees at the curb sets a strong impression.

If your business provided special benefits (health insurance, gym memberships, travel and entertainment, bonuses paid, etc.), your accountant may want to add these items back in to income when showing years of profit and loss statements. This is neither illegal nor deceptive since the new owner wants a realistic concept of the earning power of the business.

More tips for selling a business in our next post

We are living through an unprecedented period of financial adjustment in America. On one hand, acquisition prices have never been so low to outsiders, and on the other hand the credit market has all but dried up.

Some Facts:

Funding offers you hear about for mortgages and business financing are geared toward individuals with credit scores in excess of 700, excluding the vast majority of small business buyers. The vast majority of small business buyers do not qualify under the present economical situation. It will change but for today, it is all but impossible to secure a rational, reasonable funding commitment. Savvy buyers who fit into the above category enjoy much leverage in negotiations as they are aware they have a competitive advantage.

Price is not the central issue in attracting buyers today, but creative financing options are. Provable, definable profitability is key.

10,000 Baby Boomers a day are leaving the work force and looking to supplement their incomes. One of the central deal makers these educated buyers are looking at is who is willing to keep some “skin” in the game. In other words, if the owner is confident about his business, why wouldn’t he finance a portion of the transaction? For the most part, SBA and bank funding has dried up without this ingredient.

There has been a 22% increase in the use of IRA, 401k and other retirement instruments in the funding of a business acquisition. Of course there is no perfect business, but it is much safer to acquire an existing one that can be impacted by one’s knowledge and expertise.

On the positive side, interest levels in small business enterprises are at an all time high. As we enter into the historical selling season (April 16th after tax season), we expect much pent up demand.

Patience and Persistence will pay off.