Here are four of the more common beliefs about selling a business that, often as not, do not pan out.
Owner distributions are automatically included in SDE used in pricing a business. They are not. Owner distributions could be coming from monies that have been on the balance sheet for a few years. If you can show that annual distributions have been sourced consistently from excess cash in the business, they are considered. Even then, the entire amount may not be.
A competitor is always the best buyer to look for. This can be true. But depending on the industry, size and location of the selling and acquiring companies and other factors, it may not be. Additionally, in order for a competitor to gain enough knowledge and comfort to purchase, you will need to open all of the business’s financial and operational information for scrutiny. If the business doesn’t sell, your confidential information is now in a competitor’s hands.
A family member or key employee will be the buyer. This is the most common assumption made by family-owned and privately held business owners. While this can be a great way to transfer ownership with minimal change, you must be prepared to be “the bank” in order to get the deal done at a reasonable price. Most family members and key employees do not have the financial wherewithal to qualify for a business loan large enough to buy a company.
The business will sell exactly when the business owner wants to sell. Unfortunately, this is rarer then people believe. Work with your accountant and estate planning attorney to start preparing your business for sale now. Even if you plan to hold on to the business for 10-plus years or sell to that family member or key employee, the earlier you get your exit strategy in place, the better off you will be in the long run.