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:
- Partnership didn’t endure
- 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 is a factor in selling. That’s because a buyer is typically seeking a certain size business to 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.
11 Key Steps to Sell Your Business
Selling your business is a complex process, whatever the business size, and there are lots of steps to take before a business can be sold. Here are 11 of the most important steps in that process to get you started.
1. 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 said, though, you may want to additionally separate some “expense” that affect your bottom line. These would be expenses that a buyer may not incur. That’s because a buyer may opt to run things a little differently:
Those types of expenses can be termed “discretionary expenses.” Such as:
- Travel costs – Maybe as you established your company you attended national conventions or sales venues.
- Entertainment costs – Similarly, as you worked to get established to feted potential clients.
- Bonuses – Which you paid to top performers.
- Business vehicles – Perhaps you leased or purchased a vehicle or vehicles for company use.
- Medical insurance – Did you pay for medical insurance for yourself and/or family members, set up through the business?
2. 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 straight-forward. The real estate agent can compare similar sales, and put a value on your house that may include appliances, age of roof, size and 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:
- Your business tax records for the last four years.
- The value of your inventory
- The value of any business equipment.
- Proof of your customer base.
- Proof of any long-term contracts to purchase your goods and/or services.
3. 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.
4. 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 to 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.
5. 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, and it looks like a fire sale. However, you can justify a low price if there’s a reason to sell a business fast – such as unexpected illness or death. This is information to convey to a broker, if you’re using a broker.
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.
6. 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?
Talk this over with your broker. You can put this stipulation in your Agreement to Sell that you have 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.
7. Respect The Due Diligence Process
The buyer is going to wants 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.
8. 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.
9. 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.
10. 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!
11. Enjoy Your Achievements!
You’ve done it. A business sale can be extremely stressful. Take time to decompress.
6 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.
1. Not Planning Ahead
Don’t forget to plan your exit strategy.
2. Waiting too Long to Sell
Making a profit? Sell while you’re on a roll.
3. Misrepresenting Your Business
Don’t mess with financials especially tax returns. Unless you enjoy spending time in litigation.
4. Not Keeping Business Confidentiality
Nearly all sales of businesses 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.
5. Finding the Wrong Buyer
Sellers must guard against that business buyer that might even look good on paper. Thoroughly investigate the financials of a prospective buyer. The deal has to work both ways.
6. Trying to Sell Your Business Alone
This is a tough row to hoe. The myriad of paperwork that’s required is daunting for the average business sale. This is where brokers are worth every penny. Brokers that have completed many deals will streamline the process. Brokers have contacts, 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:
- Have all your financials in order.
- Create a packet which includes financials and the executive summary.
- Prescreen buyers before sending information about financials and/or the packet.
- Sell for a lower price to an employee or family member.
- 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 sample of legal documents that make up a sale, in addition to the actual purchase and sale agreement:
- Bill of Sale – Needed to transfer assets such as inventory or equipment to the buyer.
- Non-compete agreement – if necessary.
- Non-disclosure/confidentiality agreement – to be inked before sending financial information and business info (customer list, contracts, etc.).
- 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:
- As previously stated, have financial paperwork in order.
- Keep the doors open. Nothing says “Make a low offer” like a “closed” sign.
- Seek professional advice. You can start with SCORE, Service Corps of Retired Executives website, where the advice is free.
- 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?
- 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:
- Follow accounting standards and have key data organized.
- Work to develop an executive summary of the business.
- Have an exit plan.
- Decide whether to go it alone or use a broker.
- Have a marketing plan that creates interest.
- Use a business valuation calculator.
More in: Buying or Selling a Business, How to Sell