Entrepreneurs understand the struggle of building a business, from the long, frustrating hours and sacrifices to the small wins and major milestones. Companies are also challenged to find balance, search for answers, and sustain relationships with customers, employees, and families. While running a small business is hard, selling a business is often more logistically and emotionally complex. It’s a long, complicated process that requires expert advice to avoid pitfalls.
This guide covers the essential steps for selling a business.
Key Takeaways
- Business owners have good reasons for selling a business, including life changes, new opportunities, and retirement.
- The process of selling a business becomes much easier with the help of a business broker, contract lawyer, and CPA.
- Keep the sale confidential and only inform your employees when the time is right, usually after closing the deal.
- Choose a certified business broker with a solid reputation and proven marketing strategy to sell your business.
- Consider alternatives to an outright sale, e.g., an ESOP or selling a portion to a private equity fund.
Why Should One Sell Their Business? 8 Good Reasons
In an ideal world, every small business would grow, thrive, and pass on to the next generation. However, leaving a company to family members may be problematic. Other life events like terminal illness or divorce can also interfere with entrepreneurship. Here are some typical reasons for selling a business.
1. Seeking New Opportunities
Market conditions may change and present a chance to start a second business. Or you may want to go back to school to pursue a different profession. If a new opportunity means you can no longer devote your time to your business, consider selling it to someone who can sustain it.
2. An Unbeatable Offer
Profitable businesses may receive offers from buyers who see their growth potential. The buyer could be a competitor looking to expand their venture or an investor passionate about your industry. These offers are often above market value and hard to refuse.
3. It’s A Buyer’s Market
Some investors buy small businesses to grow their portfolios when the economy thrives. In a buyer’s market, entrepreneurs may have multiple attractive offers from buyers and can sell to the highest bidder.
4. Retirement Planning
Selling a business is a common option for entrepreneurs who wish to retire. The sale can pay off your mortgage, buy a new house, or fund any other venture for your golden years. Note that other senior business owners may have the same idea, thereby flooding the market with businesses for sale. If retirement is your goal, study the overall market to avoid selling at a discount.
5. Family Changes
An entrepreneur may launch a company when single and start a family later. At the same time, separation and divorce can negatively impact a business, especially if it’s stressful and drawn out. Of course, many business owners balance work and family life. But if you’re devoting less time to your company and affecting your bottom line, consider selling the business and finding a more suitable career.
6. Location Challenges
Your company’s location may evolve in ways that make your business harder to operate. For example, crime rates could rise, business rivals sabotage your company, or customers may suffer from layoffs that impact their buying power. You could relocate your business to a better location, but selling would be a lesser headache.
7. Climate Change Effects
Depending on the industry, some businesses are better equipped to cope with extreme or sudden weather changes than others. If disruptions by the increasing number of storms, floods, or heatwaves cost you money, you can choose to sell your business.
8. Evolving Business Landscape
Similarly, disruptions caused by the Covid-19 pandemic can lead entrepreneurs to sell their companies. But events like trade wars, compliance changes, or sanctions can also impact small businesses. These scenarios are beyond your control, and selling your business can save you from further losses.
Five Factors to Consider Before Selling A Business
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Suppose you face any of the above situations but still can’t decide if selling a business is a good move. In that case, consider the following factors:
- Readiness for sale: You need at least two years of tax returns and other financial preparations before selling a business.
- Advisory team: An appraiser, lawyer, accountant, tax advisor, business broker, and estate planner are some of the experts you’ll need to sell your business.
- Dependence on the owner or specific customers: If your business cannot operate when you’re sick or on vacation or gets more than 5% of revenue from a single customer, it’s not ready to sell.
- Adaptability: Business trends surrounding technology, organizational culture, outsourcing, and market forces require your business to adapt to survive. If your company struggles to keep up with these changes, it may be better to sell than get left behind.
- Industry conditions: Pay attention to your specific industry context to know the right time to sell a business. Postpone the sale if you can get better offers in a year or two.
Ten Essential Steps for Selling Business
Many business owners assume that selling a business is like selling property, but the process differs.
Let’s outline the steps for selling a business to help you prepare for it.
Step 1: Define Your Goals
There are many options for selling a business, so choose the approach that aligns with your personal and financial goals. Speak with your financial advisor about the best deal structure for your business, including:
- An employee buy-out through an Employee Stock Ownership Plan (ESOP)
- Financial buyers who can finance 50-75% of the business selling price and get cash flow to service the debt
- Strategic buyers who may offer a premium for your business as part of building their investment portfolio
Determine how much cash you want from selling your business. You may only need to sell a portion of it to meet your needs or choose to sell the whole business as an exit strategy.
Step 2: Organize Your Financial Records
Good bookkeeping makes for an easier sale since all parties will look into your financial records. Prepare your tax returns in advance and account for every cent of business income. Even if you’re selling your business because it’s not profitable, clean financial records demonstrate transparency in your operations. Work with a certified accountant to prepare these documents.
Step 3: Know Your Company’s Value
Hiring a professional appraiser is the easiest way to know how much your business is worth. However, the rule of thumb is that your company’s value is between three and six times your cash flow. Your actual value depends on numerous factors that a third-party valuator can assess, such as risk, inventory, revenue, sales, debts, outstanding invoices, etc.
Step 4: Increase Your Company’s Value
Use your valuation as a starting point to boost your company’s value before selling it. Concentrate on increasing sales, reducing expenses, and streamlining workflows as you prepare to exit the business. This strategy shows potential buyers that your business is in good condition and can meet their ROI targets. It also ensures that the business maintains momentum under new management, which makes the transition easier.
Step 5: Create A Non-Disclosure Agreement (NDA)
Selling a business is confidential, especially if you have any intellectual property (IP) or other proprietary information in your operations. An NDA safeguards all parties in the transaction from exposing or misusing sensitive information.
You can also protect yourself by hiring a lawyer to oversee all the steps for selling a business and keep sensitive documents in their care. This way, potential buyers can only access these documents with the lawyer present.
Step 6: Hire A Business Broker
A business broker is an expert at selling companies and connects you to potential buyers. An experienced broker guides you through the steps for selling a business, from linking you to a reputable valuator to negotiating the terms of sale. Of course, a business broker charges a fee, typically between 5% and 10% of your total sale price. This cost is worthwhile if you want to sell your business faster or have other responsibilities that distract you from the process.
Step 7: Draft A Sales Contract
By this point, you probably have some serious offers for your business through your broker, and your NDA is ready to sign. The next step is to prepare the sales contract or sales agreement that includes the following details:
- The full names of the parties involved
- The full description of the business and its assets
- The payment amounts and due dates (total purchase price, closing costs, interest rates)
- Closing details (location, deadline, taxes)
- Clear terms and conditions, etc.
While your business lawyer can help with this step, determine if contract law is their specialty. If not, ask for a reference and get the right expert to review the sales agreement.
Step 8: Negotiations
Remember that the purchase price is only one part of the negotiations while selling a business. Consider other factors like equity, inventory, supply chains, non-compete terms, liabilities, access to credit, employee contracts, intellectual property rights, etc. Define your deal breakers and find ways to overcome them as you progress toward closing the sale.
Step 9: Ask for Upfront Payment
As part of the contract and negotiation steps for selling a business, make it clear to your potential buyer that you require upfront payment for your company. Some buyers may prefer installments, but this exposes you to unnecessary risk.
Upfront payment ensures that you can fully exit the company and manage to pay your business sale team for their services. It also eliminates unsuitable buyers who cannot raise the full asking price despite their passion for your company.
Step 10: Prepare for Transition
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Once the sales agreement is signed, and the cash is in the bank, inform your key stakeholders about the sale to prepare them for new management. Begin with senior managers and topmost employees who must keep the company going after your exit. Expect questions from the rest of the team after informing them of the sale. They must know their jobs are secure to minimize stress, anxiety, and confusion. You can exit your business when everyone is on the same page, and the new owners take the helm.
How To Choose The Right Business Broker For Selling A Business
As mentioned in the steps for selling a business, hiring a broker can make the process easier and quicker. But brokers charge up to 12% commission, which is a hefty sum you may prefer to keep. So to choose the best business broker to sell your business, keep the following tips in mind:
- Adding Value to Your Goals
A business broker applies their expertise to your goals rather than simply following your instructions. For example, while you may have an asking price in mind, a business broker offers insight into current market conditions, opportunities for improvement, and strategies to add value to your company. This collaborative, value-centered approach to selling a business can help you reach or exceed your asking price.
- A Strategic Marketing Plan
Selling a business is more than listing your company for sale online. Of course, a business broker leverages digital resources to market your business, but a marketing plan includes both online and offline strategies. Choose a business broker with a broad network in the industry and a robust screening process. This way, you narrow down to qualified buyers and protect your confidentiality.
- Broker Services
A broker’s commission is usually a good indicator of their commitment to selling a business, but check the actual services covered in the fees. Business brokers typically charge for advertising, due diligence, negotiation, deal structuring, etc. Ask for a breakdown of these services as you compare different brokers.
- Broker Credentials and Track Record
Ensure your business broker is a Certified Business Intermediary (CBI) registered with the International Business Brokers Association (IBBA). In addition, find out about the companies the broker sold in the past year, their current listings, and their network of lawyers, accountants, and bankers. These criteria apply to both individual brokers and brokerage firms. Choose a partner with a strong reputation and experience in selling a business.
Expert Tips for Selling A Business
Keep the following tips in mind to help you manage expectations through the steps for selling business.
- Avoid Making Emotional Choices
You’ve dedicated years to building your business, but don’t let the risk of emotions take over you to a point that it can cloud your judgment, including disappointment and grief. Take the time to process your emotions about selling your company and make pragmatic decisions for your benefit.
- Consider Other Costs
In addition to your business broker’s commission, selling a business brings other costs, such as attorney fees, transfer fees, or renovations, to attract more buyers. Remember that closing the sale can take up to a year, so plan your finances accordingly.
- Anticipate NDA breaches
While keeping your plan on selling a business confidential is best, the news often leaks to your employees.
An NDA operates on good faith rather than legal enforcement, so find ways to manage breaches should they occur. Speak privately to any employees who find out about your plans. Explain that you’re stepping away from the company, not shutting down operations, so their jobs remain secure. Answer your employees’ questions as best as possible without giving away unnecessary details.
- Anticipate Internal and External Change
Time is a significant factor when selling a business because anything can happen that may affect the process. For example, the steps for selling a business could stall if a key employee resigns or industry regulations change. Remain agile and adapt to these changes as they arise; otherwise, they may derail the sale process.
- Choose the Right Deal
A low offer is disheartening, but many entrepreneurs often have an unrealistic asking price, to begin with. And if you’re in a hurry to sell, it’s tempting to take the first offer you can get. However, keep an open mind and prepare to compromise as you negotiate with your buyers. It’s better to wait for the right offer than withdraw the sale altogether or settle for less than your business is worth. Consult with your business broker to know what to expect.
- Consider A Consulting Role
In many cases, prospective buyers prefer that you remain on board as a consultant to help with the transition. However, you may not manage this if you sell a business for physical and mental health reasons. If your buyer requires that you stay on, negotiate the terms. You can opt for three instead of six months and offer your services remotely.
Conclusion
Selling a business often feels as challenging as starting a company from scratch. It requires you to look at every aspect of your business from a fresh perspective, from your finances to your employees. You must also choose a good team of experts to support your journey, from listing your business for sale to signing contracts and handing it over to new owners. When you have found a buyer, it’s important to agree on some terms. Head river to read about Letter of Intent and how it’s important when it comes to selling a business. Take the steps for selling a business as outlined in this guide and adapt them to your goals. You’ll improve your chances of getting the deal you want without the stress of selling a business.