We’ve seen some slight improvements in the business-for-sale market recently, but not enough to cause a significant jump in the number of businesses for sale. Many sellers who’ve been waiting for the right time to exit have weathered the downturn and are now ready to sell.

Will 2012 be the year to do it?

The short answer is “perhaps.” BizBuySell’s quarterly insights data continues to show year-over-year increases in the number of closed transactions reported (although these are still down 30 to 40 percent compared to the boom  in late 2007 and early 2008). Banks continue to slowly improve lending options, and both sellers and buyers are more aware of financing solutions to help close a deal. So with some optimism ahead, what should potential sellers be doing to prepare?

Start Planning Now

Business buyers are going to do their research before signing off on a sale. That means as the seller, you need to prove your business is valued correctly. First on the list is to review and set straight all your financial records. Be able to provide at least three years of documents, including tax returns, expense records and key data like customer lists and lease agreements. These will not only support your asking price, but also help bolster the buyer’s confidence that you, the current owner, have operated a well-managed business. Eliminating any ongoing business concerns will also help build this confidence. Issues like short-term leases, a reliance on one or a few key customers, and pending legal issues can endanger the sale; they should be resolved before listing your business for sale.

Remember to keep up the physical elements of your business as well. When a potential buyer visits, the physical appearance of your building or equipment will make a big impression. If it appears that the business assets need updating, the buyer will likely use that as a reason to lower the offer. So make sure to clean up, upgrade inside and out, and invest in any building or equipment improvements you’ve been considering. The less work a new buyer has to put in, the more you can expect from your final selling price.

Research the Market

Knowing where your business stands in the market will be the key to setting an effective asking price. No one wants to undervalue their business and end up netting less money than it is really worth.  On the other hand, being too confident and asking for a price well above the actual value (or the value of comparable businesses) will result in a long, drawn out sales process. The economy is showing signs of improvement, a 0.4 percent decrease in unemployment for November 2011, and business values are beginning to rise, but don’t make the mistake of asking pre-recession prices. Buyers will often have no problem paying for a strong business, but they will still scoff at overvalued listings.

So how do you find the right price? The best way is to simply compare your business to others. Do some research for similar businesses for sale. Business-for-sale marketplaces allow you to search businesses by industry, size and location. Finding what comparable business are listed and have sold for recently will be a good starting point in setting the price of your business.  You can also purchase a low-cost valuation report from BizBuySell (Disclosure: I am the Group General Manager of BizBuySell) which will allow you to see the results (selling price and multiples of cash flow and revenue that the businesses sold for) of recently sold businesses in your industry and location.  These can provide great insight into the best estimated value of your small business.

Bottom line, be honest with yourself. Go over financials and determine what buyers will notice. If revenue or profits are down, take that into consideration. Your overall pricing goal should be to attract multiple buyers, creating maximum demand and an auction-like atmosphere. Overpricing your business will kill any chances of that happening.

Spread the Word

After you determine a fair listing price, the next step is to find potential buyers. As the economy improves, this will prove even more essential. With more business owners looking to sell and more buyers on the market due to ongoing high unemployment and increased bank lending, grabbing the attention of potential buyers will be tougher than ever. Business owners who can show buyers that their business is superior to the competition should enjoy a successful sales process and outcome.

The best way to do that is to hire an experienced business broker to help you market the business. Check references to make sure the broker is accomplished in selling businesses in the area and in your industry. Also, make sure to investigate references outside of the ones he or she provides.

If you choose not to hire a broker, be aggressive with your marketing plans. Post your listing on websites to reach buyers actively searching for businesses to buy. Also utilize your trade association and appropriate trade publications who might run the information. And finally, don’t forget to reach out to your network of family, friends and work contacts who might know of interested buyers.  If maintaining confidentiality about your potential business sale is important to you, then a business broker may be your best option to successfully market your business while keeping the sale under wraps.

Expect to Offer Financing

We’ve noted that the economy is improving but banks still almost always require seller financing as part of any deal they fund. This means you won’t simply be handed a large check and be done with the sale. Most likely, you’ll get some portion of the sale amount upfront and the rest (likely 20 to 40 percent) will be paid over time, with interest. The upshot is that you will remain connected to your business after sale helping to ensure a smooth transition. This is usually a three- to 12-month period where you effectively transition the operations to the new owner and help train him or her how to be successful managing the business.  Potential buyers will also be encouraged to hear you’re willing to stay on. They’ll be more likely to make an offer, and you’ll be able to make sure the buyer continues to turn a profit, ensuring they can make the long-term payments.

If you’ve been considering a sale in 2012, take your time and do it right. Plan ahead, research your market and stand out from the competition. Knowing the sales process is half the battle. With proper preparation, you can ensure a stress free transition and a financially successful exit from your business.

Image from Andy Dean Photography/Shutterstock

From Small Business Trends

Will 2012 Be the Year to Sell Your Small Business?

Despite the steady growth of the number of businesses sold over the last few quarters, the number sold each quarter is still down roughly 40 percent from its peak in mid-2008. Put simply, our economy is no longer able to transition mature businesses to new ownership at a healthy pace.

This should be sobering news to anybody who hopes for a return to the good old days of sustained economic growth. Unfortunately, however, policymakers don’t seem to have a grasp of the fundamental economic drivers that are causing the stall. More importantly, they appear to have underestimated the negative consequences of a stagnating small business succession engine in the United States and around the globe.

What’s Driving the Slowdown in Business Ownership Transitions?

As in any marketplace, the market for business ownership succession is driven by supply and demand.  In this case, supply is the number of businesses on the market available for sale, and demand is the number of potential business buyers.  Several factors continue to affect both the supply and the demand of the business-for-sale market:

Economic circumstances have diminished the number of businesses for sale:

The economic turbulence over the past several years has discouraged small business owners from selling. For starters, the economy has turned many profitable companies into unprofitable companies, which usually makes selling the company a nonstarter. Others have managed to stay in the black, but with significantly diminished profits. These owners are hesitant to sell until the economy is doing better, their profitability is up, and there is a recovery in business valuations.

Even those companies that have managed to survive the down economy with profit levels intact are less likely to sell in the current economic environment.  With sales lagging and the additional burdens caused by the broader economy, there isn’t time for owners to think about preparing for a sale and finding a buyer.

Lack of capital is diminishing buyer demand:

During previous recessions, community banks, the SBA and other lenders  helped to aid in economic recovery by providing the capital necessary to spur entrepreneurship.  In the past, they provided small business loans to allow aspiring business buyers and entrepreneurs to pursue their dreams. However, since the recession began in 2008, banks’ appetite to fund business acquisition loans has significantly decreased. Banks are much more careful and particular about whom they will lend money to.

Based on feedback from business brokers, business acquisition loans are very difficult to find. The federal government has passed programs, most notably the Small Business Jobs Act of October 2010, that provide capital to local banks to promote small business lending. However, most in the small business market will tell you that this money isn’t reaching business buyers.  Other capital options are equally depleted due to the decline in the stock market and the economy in general.

Notably, buyers don’t have the access to additional funding that they might have had several years ago from their personal savings, 401(k) or IRA funds, or family and friends.  As a result, buyers have neither the funding nor the confidence in the current market to move aggressively toward buying a small business.

With supply down and demand flat, it should come as no surprise to anyone that fewer businesses are being sold these days. In essence, the market has been paralyzed by a lack of available capital and by fear. Sellers are afraid to sell, and buyers are afraid to buy.

What Are the Consequences of a Stalled Business Succession Market?

What does a stalled business succession market mean for the average citizen?  Imagine a world in which existing businesses were never sold to new owners. In this hypothetical scenario, current business owners would never retire. As a result, they’d never get hold of a large sum of money, derived from a business exit, that they could then spend and reinvest in the economy.

Businesses would be run without the fresh investment capital, new ideas and new energy that are usually infused by a new buyer. Unable to sell, the only option for business owners would be to shut down their businesses and cast away their former employees into the growing unemployment lines. Economic output would plummet, and unemployment would skyrocket.

It’s an extreme scenario, but we move closer to this nightmare with each and every passing day. If nothing is done to increase the availability of capital and to diminish fear so would-be buyers can become business owners, then the prognosis for economic recovery is dim indeed.

What Must Be Done?

When it comes to economic policy, no silver bullet can turn an economy around on its own.  However, smart economic policies in the small business sector can create an environment that fosters and accelerates economic recovery.

The most significant opportunity is to increase the availability of business acquisition capital.  In order to get the business-for-sale market moving again, there needs to be more capital in the form of business acquisition loans for aspiring buyers. Give the high number of unemployed potential business buyers access to capital and they will buy businesses. With an increase in buying interest, business owners will be more able to sell and to retire with cash in hand, pumping more money into the economy.

In the meantime, new business owners will leave the unemployment lines and invest in their newly acquired companies to fuel growth. Typically, this means investment in new hires, which again will lower unemployment rates.

As demand grows, fueled by increased capital availability, business valuations will rise, and sellers will come back into the market. With luck, we can transform the current economic quagmire into a virtuous cycle of economic growth. If we can get the stalled engine of business transition started again, we will all be better off.

From Small Business Trends

Economic Turbulence Is Hindering America’s Small Business Succession Engine