Thinking of selling a business? There are a variety of reasons or circumstances behind a business owner’s decision to sell their business. Whether it’s because of a planned retirement or an unexpected interest from a buyer, deciding to sell doesn’t always come easily.
If you’ve never sold a business before, you will quickly learn that it is a complex process. As you prepare to sell a business, it’s important to make sure your “house is in order.” Similar to when preparing to sell a home, you will want to invest a little money and time to make sure a business appears strong to potential buyers. You want a prospective buyer to come in and say, “I can see myself taking ownership of this business.”
Our 8-step guide to selling a small business will help you along the way as you plan an exit strategy and prepare for this next step in your career.
Review your bookkeeping records with a fine-toothed comb. As you move through the process of selling a business, there will be a lot of eyes on your finances. Lawyers, accountants, business valuation specialists and prospective buyers will all want to see the company’s financial records.
Tip: A good CPA will become your best friend during this part of the process. Work with a trusted CPA who has a lot of experience in business sales to make sure your financials are up to date. Typically, you will need to provide three years of tax returns and financial statements. Also be ready to account for the company’s total income.
An exit strategy helps you determine exactly how you plan to leave once you sell your business. Even better than having an exit strategy is having a contingency plan in place. If you find yourself selling your business unexpectedly, your contingency plan will help minimize disruption to the company, safeguard sensitive information and ensure the safety of employees.
Tip: When outlining an exit strategy for a business, be sure to include a succession plan, identify potential challenges or pain points and how to resolve them, and calculate what you need to earn from the sale to cover your personal financial needs.
When the time comes to selling a business, look to a banker to be one of your trusted advisors. Commercial bankers have gone through the process before with other clients and know the ins and outs of how to sell a business. A commercial banker can connect you with professionals like lawyers and CPAs. And they can also potentially play matchmaker. It’s not uncommon for a banker to know people within the business community who are in the market to buy a business.
Tip: Ask your bank if they have a wealth management team that can work with you and your commercial banker to help minimize the tax burden that comes with selling a small business. Wealth advisors will also have a network of lawyers and CPAs who have a lot of experience with business sales.
A big part of selling your business is determining what your business is worth. When calculating a business valuation, expect the price to be three to six times the current cash flow. Where your business falls within that range will depend on a couple of factors, the most important being the current market and industry projections.
Tip: Hire a third-party valuator. Most valuators charge a flat fee, and the investment will help mitigate the risk of a potential buyer arguing with you about the value of your small business.
If you want to market the sale of your business to the general public or don’t have any prospective buyers identified, hiring a business broker can be a good option. A business broker is a trained professional who is skilled in the ins and outs of buying and selling a business. Hiring a business broker is an investment in the selling process. On average, brokers charge between 5% and 10% of the total sale price. But the investment can be well worth it. Your business broker will help with the valuation of your company, create a prospectus of potential buyers, help negotiate the prices of your business and structure a deal.
Tip: When hiring a business broker, look for someone who specializes in selling businesses similar to yours, is willing to offer past clients as a reference, and has good connections with lawyers, accountants and other local professionals.
One very important step in preparing to sell your business is working with a lawyer to create a non-disclosure agreement (NDA) before you share any information with a potential buyer. An NDA creates a confidential relationship between the business owner and the interested buyer. This creates a safe scenario for the seller to share confidential and proprietary information and protects the business from competitors who may be trying to access this sensitive information.
Tip: You still need to be very careful about how much information you share with a prospective buyer. Even with an NDA in place, there is a chance they could take certain pieces of information, like your customer list, and use that information to their benefit.
As you get closer to closing on a deal with an interested buyer, you will need to enlist the help of a contract lawyer to draft and review the sales contract. If you are already working with a lawyer, we recommend that you make sure they are comfortable with and knowledgeable in contract law. Hiring a lawyer to draft or review a contract can cost anywhere from a few hundred dollars to several thousand, depending on the complexity of the agreement, the lawyer's expertise and your geographic location.
Tip: You aren’t legally required to hire a lawyer to draft and review your sales contract. However, it is recommended that at the very least you hire a lawyer to review the sales contract and negotiate the terms to ensure that your goals are met and that you get the best deal possible.
When selling a business, the payment terms of the sales contract should be non-negotiable. Receiving payment up front ensures that you’re able to leave the company according to your business exit strategy.
It also provides you with the cash to pay fees associated with the sale and guarantees that the buyer has the money needed to fulfill their end of the deal.
Tip: Make it clear from the beginning of negotiations that an all-cash payment at closing is your preferred and strongest position. Also prioritize a buyer who has secured financing or has cash readily available. This demonstrates their commitment and reduces the risk of the deal falling through.
Selling a business could be your chance to build a successful future for yourself, your company and your employees. Following these eight steps will help ensure that you’re well-prepared for a successful sale and a rewarding transition.
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