Selling a business can be a frustrating process if you don’t take the proper steps. From valuing your business to finding a buyer to negotiating the right contracts for the sale, there’s a lot to think about. We’ve put together the seven most important steps on how to sell a business for maximum value.
The seven steps on how to sell a small business are:
1. Prepare to Sell Your Business
Before attempting to sell your business, you should prepare by making it a turnkey business that can be transitioned to a new owner easily. You’ll need to make it look as attractive as possible to a potential buyer by cleaning up your books, paying off debt, and fixing any potential weaknesses.
Get Your Books in Order
Your accounting should be clean of errors, up to date, and ready to pull any financial data that a potential buyer may need. Experienced buyers will ask for financial data history of between three and five years. Not only should you make sure that your data is accurate, but you also need to be able to explain any poor financial performances.
The best practice in preparation for a sale is to hire an outside certified public accountant (CPA) to help audit your books and make sure your numbers are accurate and look as strong as possible. Having the same bookkeeper that recorded your numbers do an audit doesn’t give a potential buyer the same peace of mind as an unbiased 3rd party would.
Pay Off Debt
Your financials are going to look better if you don’t have debt on your books. Eliminating business debt now could increase the value of your business by improving your bottom line and strengthening your balance sheet. Many buyers will ask you to retain any nonworking capital debt yourself anyway, so it’s best if you pay it off in advance and reap the benefits of the sale process.
These debts should be paid off with cash flow from the business, even if that means you’re forced to take home less money as you prepare to sell it. While you don’t want to have any debt on the books, it can be beneficial to have open credit lines in the business’s name ready to be used by a new buyer.
Pretty much every business has weaknesses that can be improved. When preparing to sell, you should identify which weaknesses might be deal breakers to potential buyers. Once you identify weaknesses, you should first aim to fix them yourself. If you’re unable to improve them, you should be honest with potential buyers and try to provide a solution to implement post-closing.
For example, if you discover your manufacturing capacity has been reached without adding equipment, you’ll want to make sure you fix it now or address it with your buyer later. You can either purchase additional machinery or account for the cost of that equipment when you negotiate a purchase price. A buyer finding this out themselves could cost you a sale.
2. Hire Experienced Professionals to Sell Your Business
Some small business owners sell their business themselves, but it can be a very difficult and time-consuming process. It’s much easier to make a mistake or miss an important negotiation point if you’re not experienced at selling businesses. This is why you need professionals like business brokers or attorneys to help you along the way.
A business broker is going to be your best option to help you navigate the entire sales process. They can find qualified buyers, negotiate on your behalf, and maximize your sale price. The best business brokers also perform business valuations to show you what your business is worth.
Business brokers typically take a fee in the range of 8 to 12%, with more than 59% of brokers charging right at 10%. However, the time and money they’ll save you throughout the process and the higher sales price they will get for your business will make this cost potentially worth it.
An attorney is vital when selling your business so that your legal interests are protected. No matter how intelligent or experienced you are, if you haven’t been trained to look for legal pitfalls throughout the sales process. Attorneys will help draft your paperwork and provide legal counsel like how to deal with potential outstanding liabilities.
Attorney fees vary widely based on what you want them to do. Some will charge a flat fee of a few thousand dollars for drafting your documentation. Others will charge you $200 to $400 per hour to review documentation or provide legal counsel. It’s important you sit down with your lawyer before she begins work to understand your payment arrangement fully.
Certified Professional Accountant
A CPA is a good choice if you need help putting together financial information for your sale. This includes certifying that your books are accurate as well as creating projections for the future performance of your business. A third-party CPA giving your books a thumbs up gives a prospective buyer confidence in your numbers.
CPAs typically will charge a flat fee for an audit or review of your books that will range from $4,000 to $10,000, in most cases. If you’re looking for ongoing help or periodic reviews of your numbers, you can find good CPAs who charge an hourly rate of $175 to $300.
You may find that you need to hire some consultants to help you overcome any weaknesses you found during step 1 above. Consultants can help you improve your bottom line, increase your revenue, or eliminate waste throughout the organization. To find the best consultants, you should get an industry recommendation from a trusted source.
If you have a 401(k) or employee benefits plan, a consultant might help you make sure the plans are either transitioned to the new owner or that they wind down correctly. You’ll want to be sensitive regarding anything to do with your employees during a sale, and the right consultants can help you do that.
3. Determine the Value of Your Business
It’s important to value a business because it’s a good starting point for your expectations and potential negotiations with a buyer. You can do a business valuation yourself, or you can hire an experienced professional to do it for you. Doing it yourself can be difficult, and it will likely only give you a rough estimate of what your business is worth.
If you want to estimate your business value on your own, you can calculate it by following these steps:
- Multiply your discretionary earnings (SDE) by your industry multiplier
- Add any other assets the business owns, like real estate or cash on hand
- Subtract your liabilities
Your industry multiplier will typically be between one and four, depending on the nature of your industry and your geographic location. You can read our guide to business valuation to learn more about the process as a whole.
You can also use this business valuation calculator to get an estimate.
4. Prepare Business Financials and Other Documentation
Examining your financial documents is a vital part of the sale process. If you don’t have all your financials or other documents a buyer may want ready when needed, you run the risk of putting off a buyer and losing them.
While the flow of information will be constant throughout the sales process, there are three distinct times you’ll need to provide the buyer with documentation: initial interest, due diligence, and after an offer has been made. You’ll need to have different documentation prepared at each of these three phases of the sale process.
1. Initial Documentation for Potential Buyers
- Tax returns for the last three years
- YTD profit & loss (P&L) statement
- YTD balance sheet
- YTD cash flow statement
- Summary book that markets your business’s best features
2. During Due Diligence
- Proof of business ownership
- Business licenses
- Payroll summaries for one year
- Outstanding accounts payable
- Outstanding accounts receivable
- Current loan documentation
- Lease contracts
- Sales contracts
- Details of all chargebacks or “owner’s salary” in your financials
- 3 Years of P&L statements
- 3 Years of cash flow statements
- 3 Years of balance sheets
- Marketing materials
- List of key competitors
- Schedule of owner’s capitalization
- Inventory summary
3. After an Offer Has Been Made
- AR aging report
- Annual personal property tax certificate
- Full bank statements
- Any outstanding key contracts
- Detailed inventory list
- Financial operating budgets
- Financial projections for 3 to 5 years
- Team operations manual
- Organizational chart
- Customer list
- Actual inventory
- Supplier or vendor lists
- Supplier or vendor contracts
- Employment agreements for management or key employees
If you’re not ready to provide these documents, then you’ll end up slowing down your own sales process and might lose an otherwise interested buyer. A CPA or business broker can help you put this information together and advise you on any additional information you may need to get together, based on your own unique business situation.
5. Find a Buyer
There are many different ways you can find a buyer for your business, from hiring a broker to posting your business on a popular website to marketing to friends and family. Each source has its own unique strengths, but the best solution is to combine as many different ways to find a buyer as possible.
Hire a Broker
Hiring a broker can be faster and more effective than any other option when looking for a buyer. Brokers can manage the entire process for you, giving you more time to focus on operating your business and opening you up to a large pool of qualified buyers. Brokers are experienced negotiators who can help you maximize your sales price, and they’ll help you keep the entire process confidential until you have a committed buyer.
Brokers typically charge 10% of the sales price to manage all of these things for you. Selling a business can be difficult and full of pitfalls that can cost you money. Having an experienced broker helping you will not only increase your chances of selling the business, but they’ll increase the amount of money in your pocket. This makes their services worth the price you’ll end up paying.
Network Throughout Your Industry
Many businesses are sold without officially being put up for sale. This typically happens through existing relationships you may have throughout your industry. For example, a competitor may want to buy you out or another business in the industry might want to buy your business to extend the markets they’re selling in.
Finding a buyer experienced in your industry is a good fit for business owners worried about a new owner’s success. Having a new owner who has been successful in the industry gives you peace of mind about the future of your employees and the business you’ve spent so many years building.
Post the Business for Sale Online
Many business transactions originate from online listings on sites like BizBuySell. It’s a site that any business owner or broker can use to list their business for sale and reach thousands of potential buyers. Typically, posting your business for sale online is the most affordable option. It’s also commonly used along with other methods to increase the size of your buyer pool.
Posting your business online is typically right for anyone not worried about confidentiality. It’s a great tool that can help you increase interest in your business, and it can be used with any other marketing method you’re using to find potential buyers. However, when you post your business for sale online, it can be difficult to keep your employees or competitors from finding out.
6. Negotiate Purchase Agreement
Your purchase agreement is the most important document you’ll negotiate during the sales process. It will have all of the most important characteristics of your deal, including price and any seller financing terms offered. The agreement will also contain many individual deal points that you may not be aware of or have experience with. Each of these points has to be negotiated before you can close on the business.
Legal counsel can make a huge difference when negotiating your purchase agreement. While you should be able to negotiate high-level deal points such as price, a lawyer can protect your personal interests by negotiating and drafting language you may not think of. Business brokers may also be able to help with this, but they aren’t legally trained, and you may want a lawyer to verify that your interests are fully protected.
A covenant is a contractual promise made between a buyer and seller. For example, you might make a covenant not to compete with the seller directly for three years after the sale of the business. The seller might have a covenant that incentivizes employees to stay for a full year after closing.
Contingencies are actions that must be completed before the sale is complete. These are typically negotiated as part of the purchase agreement. Some examples include the buyer getting approved for bank financing or transferring all of your business leases to the new buyer.
A warranty in a business sale refers to promises about certain representations made between the buyer and seller. For example, you represent that your business financials are accurate and complete according to your knowledge. These warranties typically give the buyer comfort that what they’re buying is represented fairly.
Even the way you transition ownership of the business must be negotiated. For example, you’ll want to negotiate acceptable inventory levels at closing as well as what adjustments to the sales price, if any, will be made based on what the actual inventory ends up being. You’ll also need to negotiate when the buyer can contact employees and current customers to discuss the transition and new ownership.
All of these things include a lot of legal terms that could trip you up if you’re not either a lawyer or an experienced business broker. It’s also very difficult to give each of these negotiation points the time and attention they need while still running your business. You’re better off to hire these deal professionals to help protect your interests.
7. Close the Transaction
The best part of the sales process is closing the transaction and getting the money in your bank account. Once everything has been agreed to, and a closing date has been set, all that’s left is for both parties to sign the agreements. Once that’s complete, money and ownership will exchange hands on the agreed upon date, and you’ll no longer own your business.
Mistakes to Avoid When Selling a Business
There’s plenty of chances to make a mistake while selling a business, which could cost you a significant amount of money and time. Even if you work with a business broker and/or other professionals, you should still be aware of the most important mistakes you can make if you want to protect your interests.
Some of the mistakes you should avoid when considering how to sell a business are:
1. Waiting Too Long to Sell
You can lose value in your business quickly if you wait too long to sell. Some businesses thrive at certain periods of time throughout the year or at different stages of their product life cycle. You want to sell when your sales and net income are trending up. Waiting until they’re sliding in the wrong direction will cost you on the total value of your business.
“You must time the sale right. Buyers will often want to see a three-year trend of positive earnings. If you wait until after you’ve peaked to put your business up for sale, then you should expect to take a significant hit in your potential sales price.”
― Joshua Schneiderman, Partner, Snell & Wilmer Law Firm
2. Not Hiring Professionals
Many small business owners have made the mistake of thinking they can sell their business without having to pay deal professionals to help them. Not only is it wrong to think you can do everything and still operate your business, but it could hurt your personal interests in the long run. You may fail to get the best value for your business by spreading yourself too thin or by not having the experience necessary to navigate the sale yourself.
“When it comes to marketing your business for sale, there are some things to keep in mind. Doing the marketing yourself can be hazardous. It can disrupt ongoing client relationships should your clients learn that you are looking to exit the business. It can also create uncertainty for employees who, in turn, may seek other employment opportunities.”
― Alan Rubin, Legal Advisor and Business Transactions Department Member, Cole Schotz P.C.
3. Not Knowing the True Value of Your Business
Some small business owners think their business is worth more than it is based solely on revenue or how much cash they’re able to take home. Unfortunately, some industries sell for much less than others, regardless of the income. Not understanding the true value of your business could prevent you from agreeing to a potential sale, or you could sell it for less than it’s worth.
4. Embellishing the Truth
Potential buyers likely don’t know who you are, and the trust they have with you is based solely on how you work with them. If they find that you’re willing to stretch the truth, even a little bit, then you may lose interest. Many buyers don’t want to work with someone if they have to be skeptical of what they’re hiding.
5. Not Getting All Agreements in Writing
Even if you’re able to find a buyer and come to an agreement with them, you can mess up the whole process by not getting everything in writing. If you agree to something, you need to put it in a contract so that there are no last-minute disputes as you’re about to go to closing. The last thing you want is to not sell based on someone changing their mind about a small deal point at the last minute.
Bottom Line: How to Sell a Business
For more information, check out what the pros had to say regarding the tips for selling a business. Selling a business is difficult enough without having to do it on your own. From valuing your business to negotiating the most important contracts, a business broker can make the process easier for you. They can also improve your chances of closing a sale while maximizing the price you’re able to get for your business.