How to Sell a Business: A Step-by-Step Guide

Many small business owners who have spent years building a successful enterprise see their company as an extension of themselves. But sooner or later, there often comes an opportunity or a need to sell the business and step away. That calls for a shift in perspective.

Selling a business requires examining it as an external asset, as if through the eyes of a potential buyer. To see your company in this new way, it may be useful to talk to business brokers and other professionals who can bring their expertise to bear.

In the meantime, following a sequence of well-defined steps can make the transition more manageable. Going through this process will put you into a seller’s mindset, helping you reap the maximum reward for your years of hard work.

How to Sell a Small Business by Owner

As you ponder the question “how do I sell my business?” you have to take a step back from its ordinary operations. But at the same time, you need to sustain the operational structure, trained staff, and client base that give the business its value. The enterprise is now the product you’re offering, so you’ll want to showcase it effectively.

Step 1: Organize Your Financial Records

Be ready for potential buyers to scrutinize your business financials for at least the past three years. You’ll very likely be asked to provide bookkeeping records, financial statements, and tax returns. Make sure all profit and loss statements align with balance sheets.

Recommended: How Much Tax Can My Small Business Expect to Pay?

Step 2: Determine Your Business Valuation

Setting aside external factors like the current economic climate or consumer trends, you can determine how to price the business for sale on the basis of its internal workings. The goal is to set a realistic, defensible minimum market price.

There are three common business valuation methods you can apply.

•   Asset-based valuation focuses on the current market value of items owned by the company (after accounting for outstanding liabilities such as financing costs). It requires calculating the current market value of land and real estate, equipment and furniture, and intangible assets such as intellectual property. A variation on this is to calculate a company’s “book value,” which relies on the net value of assets as they were recorded on the balance sheet.

•   Earnings-based valuation relies on expectations of the business’s future annual income. Calculations should reflect adjusted cash flows; this minimizes any distortions caused by fluctuations in earnings. There are many formulas you could use for this kind of valuation. Some rely on multiples of past or projected earnings. Others center on expected future cash flow, adjusted for foreseeable risk.

•   Market-based valuation compares your business to similar businesses that have recently sold. With a very small business, it may be difficult to find data for comparisons. But for larger businesses, there may be publicly traded competitors whose operational information could serve as a benchmark once you’ve scaled it down to match your company’s size, profitability, and risk.

Step 3: Assemble Your Professional Team

Knowledgeable pros will plan a safe exit strategy that protects your wealth. In addition to a certified public accountant (CPA), whom you may already have in place, your squad should include an experienced transaction attorney and a certified business appraiser or valuation analyst.

Hiring a third-party appraiser can lend credibility to your sales price. Their recommended price will be based on objective analysis and financial projections rather than informal estimates or inflated expectations. To find a potential appraiser, you can ask around at accounting practices, business brokerages, or investment banking firms.

Step 4: Prepare a Confidential Information Memorandum

A confidential information memorandum (CIM) is a wide-ranging overview of your business that your broker or investment banker presents to potential buyers. It describes the full scope of your company’s operations, including:

•   Financial highlights

•   Core business lines

•   Strategic direction

•   Growth initiatives

•   Customer retention data and strategies

The CIM should also include a strategic assessment of the competitive landscape that highlights your company’s position in the industry.

To ensure confidentiality, be sure that all potential buyers sign nondisclosure agreements (NDAs) before you show them the CIM.

Step 5: Market Your Business and Screen Buyers

To find potential purchasers, you can start by analyzing people and firms who already know and appreciate your business.

They may be friendly competitors who want to make a strategic acquisition; customers or suppliers who want to cement a connection that already works for them; or private investors with opinions about the company’s potential. Knowing their motivations will help you tailor your marketing approach accordingly.

Identify the communications channel that’s most likely to reach each type of potential buyer. Options include digital marketing tools (such as LinkedIn ads or targeted emails), industry publications, business sale websites, and networking events.

At the same time, discretion is key. A professional broker knows how to attract qualified buyers without naming your business or revealing sensitive information. Protecting your business’s identity shields your company from rumors or other external attacks that could affect the sale price.

The broker will also vet buyers by assessing each potential purchaser’s background, investment history, and funding before you proceed with detailed discussions.

Recommended: Business for Sale: Owner Financing, Defined and Explained

Step 6: Negotiate Terms and Complete Due Diligence

At this stage, you should rely on your broker, CPA, and attorney to mediate and manage the process. If you put your efforts toward running the business profitably, you can ensure its performance remains strong, which bolsters your negotiating position. Ideally you’ll have interest from multiple bidders, giving you additional leverage.

Once you’ve selected a possible buyer, they’ll sign a letter of intent that gives them exclusive access to your company’s financial documents for 30 to 60 days. Their due diligence will surely involve scrutiny of long-term liabilities and debt as the buyer looks for reasons to adjust their provisional offer price. Expect some haggling before a final deal is reached.

Although an all-cash tender can be tidy, efficient, and satisfying, a buyer who secures small business financing may be able to offer more money overall.

And remember that the terms of a deal go beyond the upfront price. Your net proceeds will be impacted by legal, accounting, appraisal, and broker fees, not to mention tax consequences. Analyze the deal structure to make sure that scheduling, loan parameters, escrow plans, and any payouts based on contingencies are in line with your expectations.

Recommended: How to Buy a Business

Step 7: Close the Sale

Once due diligence is officially done and the offer is finalized, your attorney can draw up a sales contract with all the details. Confirm that all holdings are included, so as to avoid problems after the sale has been finalized.

If you’re staying on in a post-sale consulting role to ease the transition, a period of 12 months is typical. Make sure compensation is spelled out clearly in a separate consulting agreement.

You’ll probably be presented with a non-compete agreement, too. You can negotiate its duration — two to five years is common — along with any geographic or industry restrictions.

All of these agreements go into effect as soon as they are signed unless otherwise specified.

Tips To Maximize Your Business Sale Price

Buyers want to feel confident they’re making a wise decision in purchasing your business. A fixer-upper is risky, but a turnkey business that is well ordered and self-sustaining is very attractive.

Here are some pre-sale moves that will set the business up to keep generating profits after you’re gone:

•   Put in place a strong group of employees and managers who can carry out plans you’ve already established.

•   Make sure these managers are handling key client and vendor accounts, rather than routing those discussions through your personal phone or email.

•   Optimize and document all processes, setting out clear standard operating procedures (SOPs) for daily tasks.

•   Keep financial records current, clear, and organized.

•   Maintain software, equipment, and facilities as usual.

•   Resolve any outstanding legal issues.

•   Lock in long-term agreements with important suppliers and customers.

The Takeaway

Give yourself 12 to 24 months to prepare for selling your business. The time is well spent organizing financials, resolving operational gaps, and assembling a professional advisory team. The team — including a CPA, attorney, and business appraiser — works to ensure accurate valuation, protect confidentiality, and vet qualified buyers. Optimize operations and document standard procedures before listing, so you can demonstrate that your enterprise is self-sustaining. This increases its appeal and helps maximize your final return.

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FAQ

How long does it typically take to sell a business?

For best results, allow yourself 12 to 24 months. That gives you time to identify and fix operational or financial flaws before moving into the active sales stage. You can expect the sale itself to take 6 to 12 months, assuming the deal isn’t too complex. A typical timeline is:

•   One or two months of initial preparation

•   Three to six months for finding potential buyers

•   One to three months of formal due diligence

What taxes do I owe when I sell my business?

The tax bill depends on the quantity and type of assets held by your business. The IRS considers each asset to be sold separately, with the gain or loss calculated and then taxed according to its category. The IRS treats capital assets, depreciable property, real property, and property held for sale (such as inventory) in different ways. You will definitely need your accountant to calculate your overall tax liability from the business’s sale.

Do I need a broker to sell my business?

It depends. If you already have a buyer lined up, feel confident about valuation, and have a trusted lawyer on hand for legal matters, you may do fine without a broker. You’ll save the typical 8% to 12% broker commission, but you will be responsible for managing the complex, time-consuming sales process.

Otherwise, hiring a broker can benefit you in many ways. Brokers know how to access buyer networks, protect business anonymity, and deal with subtle aspects of valuation. Ideally, they’d negotiate a higher sale price that would cover the cost of their fee.

What is the difference between an asset sale and a stock sale?

With an asset sale, a buyer purchases specific assets piecemeal; a stock sale transfers the entire business at once. Stock sales are simpler and easier. Asset sales typically require multiple agreements and may generate larger tax liabilities. Your CPA can walk you through the potential financial outcome for each type of sale.

How do I find qualified buyers for my business?

It’s natural to start with your personal and professional contacts, but that can make it difficult to keep your business affairs confidential. For greater privacy, you can check out business-for-sale online marketplaces. There are so many that you can probably find one tailored to your business type, whether that’s software services, hospitality, retail, or something else. The best ones vet potential buyers before releasing any of your information. If you’re working with a broker, they will hunt up qualified buyers as part of their service.

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Photo credit: iStock/oakstudio22

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