Selling a Business - Explained
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Deciding to Sell
Selling a business is commonly the objective of startup ventures. Many factors go into the decision of when and whether to sell a business.
Valuing the Business
Numerous methods exist for valuing a business. The method relied upon generally corresponds with the type of business, the stage of the lifecycle, and the type of investor. We advise consulting a professional who has experience valuing your type of business. We discuss valuation methods further in our Startup Finance Resources. Here is a brief list of categories for valuing a business:
- Asset-based Methods
- Market-based Methods
- Cash-flow Methods
Sometimes buyers approach the business to initiate discussion for sale. Other times the business owner actively searches for buyers. Finding potential buyers is often difficult and many business owners business brokers who have experience in handling the sale of businesses. The sale of larger businesses may require additional help from either a commercial bank, CPAs, and attorneys. Depending on the type of business, potential buyers expressing interest in the business is a common occurrence. Startup ventures attract a great deal of attention from potential investors and acquirers. Startups often receive interest from dozens on interested, potential buyers before arriving at a deal. Meanwhile, lifestyle businesses are rarely approached by potential buyers unless he or she is serious.
Negotiating a Deal
Deal negotiations, like other parts of the buying/selling process, vary depending upon the type of business. The sale of a startup generally begins with an inquiry from a potential buyer. During this phase a potential buyer is made privy to the information necessary to do a cursory evaluation and value the business. After some preliminary discussions, the parties often engage in term sheet negotiation. This process lays out the major provisions of the purchase. The parties then enter into a stage of due diligence. Here the buyer employs professionals to verify the structural, operational, financial, and legal stability of the business. Once any issues associated with due diligence are negotiated, the deal is memorialized in a purchase agreement. The terms of the purchase agreement are fairly standard. One important aspect of the deal that may vary between deals is the method for financing the sale.
Financing the Sale
Financing of a business sale comes in a variety of forms. In the case of smaller businesses being acquired by a larger business, the larger business may be able to pay cash for the purchase. In the purchase and merger of smaller businesses, there is generally either seller financing, bank financing, or some combination of these financings involved. Other financing deals include the use of cash, debt, and equity of the acquiring company. Acquisitions of larger companies generally consists of detailed and complex financing arrangements involving multiple types of debt. The issue of buying and selling business is discussed further in the Startup Financing Resources.