The Ins and Outs of Selling a Small Business

There are more than 26 million small companies in America, most of which employ fewer than 20 people. Baby boomers—the oldest 3.2 million of whom are celebrating their 62nd birthdays this year—run a significant proportion of these companies and just might be ready for a little leisure time. Floyd Salser, 64, and his wife Connie, 60, spent the last 23 years building a multimillion-dollar company that manufactures water-meter test equipment in Ocala, Fla. Now, he says, they're itching to go fishing and "do some motor-homing."

(Gary Buss/Taxi/Getty Images)

But the process of retiring isn't nearly as easy for the Salsers and their entrepreneurial cohorts as it is for boomers with jobs. No doubt that all retirees confront financial and psychological hurdles. But entrepreneurs face another complication altogether: what to do with their companies. Some small number will pass the business to a child. A minuscule slice will take companies public. But for the Salsers and most owners, selling is the only realistic exit strategy. And that, it turns out, is a full-time job that most entrepreneurs aren't well prepared to do.

Depending upon the industry, the success of a business, the hush-hush nature of the sale, the complications of financing and a number of other factors, it can take six months to three years to sell a company. And many never sell. Of the 50,000 listings on BizBuySell.com (the industry's largest business listing website) at any one time, about 1,000 close every month, says general manager Mike Handelsman.

So what separates owners who sell quickly, for a decent price, from the rest? Smart owners employ several successful strategies:

1) Prepare early. Owners start readying their companies for sale as early as three years before they want to sell. About 90 percent of all sellers employ business brokers or investment bankers rather than taking on the selling chore themselves. (Business brokers are the "real estate agents" of small business; they help people buy and sell companies worth up to about $10 million. Investment bankers usually represent larger companies.)

2) Price reasonably. Successful sellers also price their companies fairly, in contrast to the average company owner, who overvalues his company by 20 to 30 percent, says Tom West, publisher of the annual Business Reference Guide, the bible of the business brokerage industry.

3) Keep growing. Smart owners also sell while their companies are growing rather than waiting until they've peaked. And, while the typical entrepreneur would rather get a 100-percent cash deal, the reality is that 3 out of 4 sellers wind up financing 60 percent or more of the sale—especially when credit is tight, as it is now. "There are very few people out there who can afford to pay up front in cash," says Colby Sambrotto, a New York-based entrepreneur who in March is launching BizTrader.com, a website for business buyers and sellers.

4) Use a broker. Last week, Jolly Higdon, 65, was frantically gathering last-minute documents in preparation for his closing on Friday. When he decided to sell the Hot Springs, Ark., air ambulance service he founded in 1988, he hired broker Scott Godsey of VRR Mergers & Acquisitions in Bentonville, Ark., to find a buyer and guide him through the sale. After about 10 months of hard work, Higdon was selling for an undisclosed sum.

Like most owners, however, Higdon isn't slamming the door on his way out. He's agreed to stay on for a year to help train the new owners. And he financed, at 9 percent interest, a piece of the sale for five years. If his agreement with his broker is typical, he's also paying Godsey an 8 to 12 percent commission.

Potential sellers often gripe about the commission. But industry advocates like West, along with brokers like David Fairley, a Yelm, Wash., specialist in selling website companies, counter that brokers sell companies for an average of 15 percent more than a seller can independently, meaning that the represented seller makes more even after paying the commission.

It's a tricky industry. For years, business brokers have suffered from questionable reputations. "It's been shared with me that some business brokers are sleazeballs," says Higdon, who adds, "I'm very thankful that we were fortunate enough to find Mr. Godsey."