If you've been waiting for a healthy environment to sell a small business, 2014 may be your moment.
The BizBuySell Insight Report, published by the online business marketplace BizBuySell, found that the number of small-business deals that closed in 2013 increased by 41.7 percent in the third quarter compared to the same quarter in 2012, with restaurants and retail businesses seeing the most action. The median sale price for small businesses in Q3 of 2013 was $180,000—up 2.9 percent from the same time the previous year, though a little below the median asking price of $199,000. On average, selling prices were equal to 2.19 percent of cash flow.
The healthy selling climate seems likely to continue—which is good news for those who are eager to retire or cash out. Among mergers-and-acquisitions insiders, 68 percent expected the market to pick up strength in the 12 months following September 2013, according to a survey released in October by the law firm Dykema, headquartered in Ann Arbor, Mich.
With interest rates still low, experts say many buyers should be able to access affordable financing. "You've got a pretty good window in 2014 where rates will begin to start to rise but still stay at historically low levels," said Mitch Davidson, managing director of Post Capital Partners, a New York City private equity firm focused on the lower end of the middle market. "Debt finances a significant element of these transactions."
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Of course, the market for any small business can be unpredictable, so owners shouldn't sell just because there's momentum now, say experts. There need to be other compelling reasons to put a business on the market, whether that's the desire to move on to a new venture or to slow down.
"Market timing is always tricky, so I'm not sure that anybody should be waiting for just the right time to sell," said Kevin O'Connell, a partner in the corporate department at Boston-based law firm Posternak Blankstein & Lund, who works in mergers and acquisitions.
If you are considering selling a business at some point in the near future, it is important to get it into shape to reap the maximum return on your investment. Here are five strategies experts recommend. The best part: None of these will be wasted efforts if you reconsider selling, because all will make your business stronger.
1. Get your books in order.
A recent Citibank Small Business Pulse report found that 25 percent of small-business owners expect to sell their company to a competitor or third party as an eventual exit strategy. But many business owners keep sloppy books, which can scare away buyers—especially sophisticated ones, like private equity firms. They want to see evidence of profit and actual or potential growth, said O'Connell.
To give buyers confidence, Davidson recommends getting audited financials for several recent years, which can be costly but makes a business more attractive. "It is a great investment to make," he said.
Don't put off getting your financials in shape, even if you're planning to wait another year or two to sell. Often, small-business owners have to put their business on the market unexpectedly due to health problems, accidents or a family member who needs care, said Bill Watson, a former CPA. As owner of Advanced Business Group in Nashville, Tenn., he helps business owners build the value of their businesses and sell them. "Make sure you're ready to sell at all times," he advised.
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2. Protect your intellectual property.
This can help you amp up the value of your business, but it's not always a speedy process, so plan ahead. "If you need to get a patent for something, that's something you need to consider very early in the process," said Tatiana Melnik, an attorney in Tampa, Fla., who works with both start-ups and established businesses. "Spend the time trademarking your company name. Get copyright protection for whatever you are developing. All of that has value."
Sometimes owners who do this discover that they have been infringing on the trademark of another business unwittingly. You'll be much better off if you find out early and fix the situation before you're in talks with a buyer. "A lot of times people don't find out until they're considering selling," Melnik said.
3. Make sure the business isn't dependent on you.
A business that depends heavily on the presence of one person to succeed—such as a creative services business where clients are paying for your personal talent or expertise—can be very difficult to sell to another buyer. "Generally, if your business relies less on the owner, you get a higher selling price," said Jock Purtle, a broker of Internet businesses who runs Digital Exits, a Sydney, Australia–based firm that does 90 percent of its deals in the U.S. "If the operations are managed by staff or systems or technology and there's less day-to-day importance of the owner, you're going to get a higher price."
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One of Purtle's clients, Travis Jamison, founder of Supremacy SEO, located a buyer within about a month when he recently decided to sell an ecommerce store he launched to sell guides telling consumers how to "jail break" iPhones, a growing craze among the tech savvy. The process, which is legal but is discouraged by Apple because it can lead to problems like security vulnerabilities, lets the phones' owners unlock the code so they can download apps from outside the iTunes store.
Jamison's secret to finding a buyer quickly: "I built it to sell from the get-go," the serial entrepreneur from Ashville, N.C., said on a call from Ho Chi Minh City in Vietnam, where he has been staying. From the time he started the business in February 2013, he used his expertise in search engine optimization to make sure the store ranked high in Google. He automated virtually every aspect of the business, from taking orders to providing outsourced customer service in the Philippines. And he hired an employee to run it while he travels around the world—a sign that someone else could run it. And he kept good written records on his procedures. "You want everything to be written down in a process," he said. "Otherwise, there will be questions and uncertainty about it."
Due to the terms of the deal, Jamison could not disclose the amount of the sale, but he said that the ease of running the ecommerce store made it very appealing to the entrepreneur who bought it.
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4. Know what your business is worth.
One of the first steps Watson recommends to owners who seek his help in selling a business is to get several independent valuations done by reputable firms so his clients know where they stand. If they have the energy to make a push to increase the value of the business, he works with them to identify strategies that will help. Sometimes this may mean going after bigger contracts to increase the "sellable cash flow." In other cases, it could mean making strategic investments in the business that will make it worth more.
"I had a client that needed a $60,000 computer upgrade," he recalled. "They could have leased that product from someone, or they could go out and buy that product and depreciate it. As far as the cash they spent, it was about the same either way." However, each route would have a different impact on the firm's value. "On the market, if you lease it, it's an expense of the business," he said. "That $60,000 comes straight out of their cash flow. They increased value of $180,000 by buying the computer upgrade. It had a tremendous effect on their value."
5. Don't keep secrets.
"Buyers do not like surprises," said Posternak Blankstein & Lund's O'Connell. "Don't hold back on that uncomfortable litigation that has been filed against you. Whatever skeleton you have in the closet, be prepared to talk about it early. The longer you wait, the more disappointed the buyer will be. The greater the likelihood you will spoil the deal." If you're involved in litigation, have toxic goo buried in the backyard or are grappling with employee unrest, you may need to resolve those problems to get the best selling price. Regardless of what the market does in 2014, it will be easier to sell a business that's thriving.
—By Elaine Pofeldt, Special to CNBC.com