How To Sell A Business

Wondering how to sell a business? You have specific steps to take if you’re ready to sell your business. Even if you’re just thinking about selling your business, you should start taking those steps now.

That’s because you’ll need concrete and detailed records to prove the value – the price – you put on your business.

You will also have decisions to make about how to sell your business. Use a business broker? Sell on your own? Choose a lawyer? You can start your investigation into those decisions now, even if your plan to sell is a year or two away.

For more on this topic download BizBuySell’s Guide to Selling your Small Business as a training tool. To sell your small business, go to Sell a Small Business on BizBuySell. If you’re interested in buying a business instead, you can also download their Guide to Buying a Small Business.

Why Sell a Business?

Let’s say you have a daycare business for sale. Your reasons for selling your business are important to you. The reasons may also be important to your potential business owner. The reasons must make sense, and not discourage, prospective buyers.

Here are some future business owners would easily understand:

1. Retirement
2. Partnership didn’t endure
3. Illness or death

Other reasons for selling your business may be harder to convey in a positive manner. Is the business doing so well that you as company owner feel constantly overworked? Have you burned out as a result? If those facts are presented in the proper context, a buyer may become even more eager to buy!

What about the timing of business sales? When is the best time to sell?

During years of profitability and performance – Why sell when your company is making money? The short answer is that the company is much more attractive compared to a company that is losing money. Did you get a really nice contract? A contract that would convey to a buyer? Might make it a perfect time to sell.

Selling a Small Business

The size of your company plays a significant role in how to sell a business. This is because buyers generally look for businesses of a specific size when making a purchase.

But other than that, here’s a case where size doesn’t matter when you’re selling a small business. The steps are the same or similar.

Key Steps to Sell Your Business

Selling your business is a complicated process, regardless of its size, and there are many steps to complete before a sale can occur. Here are key steps in that process to help you understand how to sell a business and get you started.

Sort Out All Accounting Records

Your accounting records should mirror accounting standards. That way, your profits can be easily compared to similar businesses. That’s because the same process has been used to maintain and compile the accounting records. As long as your accounting records have followed standards, your financial data can be compared to industry benchmarks.

With that in mind, you might also consider separating certain “expenses” that impact your bottom line. These are expenses that a buyer may not need to cover. This is because a buyer might choose to manage operations in a different way:

Those types of expenses can be termed “discretionary expenses.” Such as:

1. Travel costs – Maybe as you established your company, you attended national conventions or sales venues.
2. Entertainment costs – Similarly, as you worked to get established to fete potential clients,
3. Bonuses – You paid top performers.
4. Business vehicles – Perhaps you leased or purchased a vehicle or vehicles for company use.
5. Medical insurance – Did you pay for medical insurance for yourself and/or family members, set up through the business?

Hire a Valuation Expert and Find Out Your Business Worth

When you sell a house, you use a real estate appraisal to prove the price you set. That process is fairly straightforward. The real estate agent can compare similar sales and put a value on your house, including appliances, the age of the roof, and the size of the grounds.

To sell your business, you need a specific business valuation expert. That’s because there can be many factors that affect the price. Here are examples of information the business valuation expert may use to help you set a price:

1. Your business tax records for the last four years.
2. The value of your inventory
3. The value of any business equipment.
4. Proof of your customer base.
5. Proof of any long-term contracts to purchase your goods and/or services.

Work Out an Exit Strategy

How are you going to handle the profit from your business sale? You’ll most likely need a financial manager or specialized CPA for this part of the plan.

Typically, you’ll hear the words no one likes to hear – Capital Gains. How to handle capital gains must be part of your exit strategy.

Many business sales are considered asset sales. An asset sale is usually taxed at the long-term capital gains rate, which is 15%.

Determining the value of assets can be part of the negotiations as you sell your business and make an exit plan for the money. Assets are grouped by type, such as capital assets, depreciable property, and inventory or stock.

The dollar value that you and the buyer agree upon for these assets can affect the amount of capital gains you pay. This can be part of the sale negotiation process and this why shouldn’t sell your business with no exit strategy.

Market Your Business

Are you going to sell on your own? Are you going to hire a business broker? Either way, you can contribute to the process, and it’s important that you do.

Create an executive summary. This is where business sellers can be proactive and answer any questions future owners may have. Think of it as a business diary. An executive summary is an account of the life of the business, from start to present. To cover all the topics, describe any products, and define the supply chain, with an eye for answering potential questions.

You don’t need official numbers in the executive summary. In fact, financial information about the business should only be given to a buyer that is pre-qualified to buy.

The executive summary is the spot for detailing information and answering questions about your reasons for selling.

Who’s going to market the business, you or a business broker? Either way, a marketing plan should be developed. If you’re going with a business broker, you can offer your ideas while respecting the broker’s expertise.

Put Your Business on the Market

Before you list your business, share your plans with family members or employees. You may even share information with trusted customers if you think one would be interested in the purchase.

However, letting people know your plans to sell your business can be dicey. Could you cause a mass exodus of employees? Or worse, customers? Business owners should be careful letting the cat out of the proverbial bag.

One of the easiest ways to list a business on the marketplace is via Sell Business on BizBuySell. However, before you take that step, you should think carefully about developing an explanatory letter for customers, as well as informing employees because all of those people are going to find out about the sale.

What about the price? Just as with a home sale, too high or too low is a mistake. Too high, and the property is one the market too long. Potential business owners could look at the date of the listing and start to wonder what’s wrong with the business.

Too low of a price can give the impression of a fire sale. However, if there is a legitimate reason for needing to sell a business quickly—such as an unexpected illness or death—you can justify a lower price. Be sure to communicate this information to your broker if you are working with one.

You should know that the time frame for sale of businesses is typically from six months to two years. Most sales of businesses are closer to the two-year mark. So, don’t let the passing months without a sale prod you. Stay firm on the price.

Sift Through Prospective Buyers: Find the Perfect Business Owner

Financial screening is of utmost importance. Those tire-kickers can be more than annoyances if you don’t prequalify each prospective buyer.

Do you really want tire kickers to get inside financial information about your business? And do you want to waste time providing that information, and having showings of the company?

Discuss this with your broker. You can include this stipulation in your Agreement to Sell that you have established with the broker.

The broker can also advise you on if and when to accept an offer. The art of a deal includes negotiation. Few buyers would expect you to take the first deal that’s inked. A broker may pressure you, but the decision is yours.

Keep in mind, though, if someone offers the asking price and your decision is not to take the money, you’ll owe the broker fee.

Respect The Due Diligence Process

The buyer is going to want lots of information and the topics covered mostly deal with financials. Don’t lose patience. The buyer wants the same information you’d want if you were buying a company.

Due Diligence paperwork may include financial information, as well as info about licenses, property or equipment leases, and any pending/ongoing litigation.

• Financial Records: Buyers will thoroughly examine your business’s financial statements, tax returns, and related documents for the past several years to assess profitability and stability. Ensure all your records are comprehensive, transparent, and well-organized to expedite this process.
• Legal and Contractual Documents: This includes a review of all contracts, agreements, leases, and legal paperwork your business holds. Buyers check these documents for any obligations, liabilities, potential legal issues, or terms that might affect the business’s value or operations.
• Operational Overview: Potential buyers will delve into your company’s operational processes, supplier relationships, inventory management, and customer base analysis. They’re looking to understand how your business functions daily and what potential operational risks may exist.
• Market Position and Competition Analysis: Buyers are interested in understanding the market position of your business, including a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats), competitive landscape, and any market risks or advantages your business might have.
• Employee and Management Information: Expect buyers to request details about employee roles, salaries, benefits, and overall company structure. They will assess the strengths of the management team and employee relationships, looking for any potential human resource issues that could affect business continuity.

Negotiate an Agreement and Close the Deal

In price negotiations, you may negotiate the price of pieces of the business. This can include inventory and equipment. It can also include depreciable property.

Hire a Lawyer and Finalize the Contract

Even if you list and market the business on your own, you’ll need a lawyer to close the sales process. And not just any lawyer. You’ll need a lawyer or a law firm that specializes in business sales.

Receive Payment Upfront

The percentage of the down payment requirement may vary, depending on the bank. Upfront payment is a non-negotiable element of the sale. Potential buyers who don’t have upfront money are just that – potential buyers. Potential buyers may not yet be ready to become actual buyers!

Enjoy Your Achievements!

You’ve done it. A business sale can be extremely stressful. Take time to decompress.

How to Sell Your Business Summary

Mistakes to Avoid When Selling Your Business

Of course, people make lots of mistakes when selling a business, too. So, we’ve put together the most common mistakes to help you avoid them.

Not Planning Ahead

Don’t forget to plan your exit strategy.

Waiting Too Long to Sell

Making a profit? Sell while you’re on a roll.

Misrepresenting Your Business

Don’t mess with financials, especially tax returns, unless you enjoy spending time in litigation.

Not Keeping Business Confidentiality

Nearly all business sales include a nondisclosure or confidentiality agreement. This is not paperwork that is done when the business sells. It must be done before you provide any financial information about your business.

Finding the Wrong Buyer

Sellers must guard against business buyers who might even look good on paper. Thoroughly investigate the financials of a prospective buyer. The deal has to work both ways.

Trying to Sell Your Business Alone

This is a challenging task. The extensive paperwork involved in an average business sale can be overwhelming. This is why brokers are invaluable. Experienced brokers who have facilitated numerous deals can simplify the process. They also have connections, including lenders.

How to Sell a Business Quickly

If your main goal is a fast sale, keep in mind you may not get the highest price tag.

But here’s how to get it done:

1. Have all your financials in order.
2. Create a packet that includes financials and the executive summary.
3. Prescreen buyers before sending information about financials and/or the packet.
4. Sell for a lower price to an employee or family member.
5. Keep interest high with aggressive marketing.

Selling a Business with a Commercial Lease

An owner may have a commercial lease which complicates selling a small business. The owner may be able to transfer “interest” in the lease to buyers. But the lease can only be transferred to buyers if that’s allowed in the original lease agreement.

Either way, notify your landlord.

How much does it cost to sell your business?

The average cost of selling a business, if you use a broker, is the broker’s 15% commission which is based on the sale price.

There will also be legal fees.

How do I legally sell my business?

Here’s a list of legal documents involved in a sale, alongside the actual purchase and sale agreement:

1. Bill of Sale – Needed to transfer assets such as inventory or equipment to the buyer.
2. Non-compete agreement – if necessary.
3. Non-disclosure/confidentiality agreement – to be inked before sending financial information and business info (customer list, contracts, etc.).
4. All Rights Reserved – All rights reserved is a copyright formality indicating that the copyright holder reserves all the rights provided by copyright law.

How long does it take to sell your business?

Some businesses sell within six months, especially a sole proprietorship. Most of the time the sale of a business takes closer to two years.

Expect your sale to take two years, and remain firm on the price tag.

How do you sell a struggling business?

Yikes. You’re struggling, and you want to sell a business fast. But what if it’s not currently a success? Here are some tips:

1. As previously stated, have financial paperwork in order.
2. Keep the doors open. Nothing says “Make a low offer” like a “closed” sign.
3. Seek professional advice. You can start with SCORE,the  Service Corps of Retired Executives website, where the advice is free.
4. Make other plans. How should the business take shape if you can’t sell it? Is there anything you can do to make it a success?
5. Use a broker, especially one who understands the metrics of your business type.

What is the best way to sell your business?

To sum up:

1. Follow accounting standards and have key data organized.
2. Work to develop an executive summary of the business.
3. Have an exit plan.
4. Decide whether to go it alone or use a broker.
5. Have a marketing plan that creates interest.
6. Use a business valuation calculator.

Image: Depositphotos

This article, "How to Sell a Business" was first published on Small Business Trends