While starting a business and watching it grow is part of the fun, the ultimate goal for many business owners is to eventually reap the monetary rewards and see years of hard work finally pay off with a successful business sale.
And if you’ve been thinking about selling your small business, right now might be an especially good time due to a number of factors:
- According to Forbes, both US deal volume and value are up YoY.
- The economy grew 6.6% in Q2 of 2021 and is now greater than pre-pandemic levels.
- There’s a decent amount of demand, as buyers have cash to spend.
- While Donald Trump slashed the corporate tax rate during his presidency in 2017, taxes may rise soon if the Biden tax plan passes.
- While BizBuySell’s Q2 Insight Report shows that the number of sold businesses is still rebounding from the pandemic, the median sale price, revenue multiple, and cash flow multiples are higher than ever.
- Interest rates are still near 0%, which could drive more interest from buyers who need financing.
Before you rush to put your business on the market, though, keep in mind that selling a business can take a long time — especially if you want to do it right (i.e. get the price you deserve). You’ve worked hard and put a lot into your business — don’t waste your efforts with a hasty sale.
While every sale is different, we’ll give you an overview of what the selling process usually looks like and some tips to optimize the process below.
Step 1: Start planning early
If you leave with just one takeaway from this article, make it this: start planning as soon as you can. You don’t want to wait until you’re forced to sell your business because of an illness, unexpected competition, or another issue—timing is everything if you want to maximize your return on investment and find the right buyer. In fact, your timing alone can save (or cost) you thousands of dollars.
Generally, the more you prepare for the sale, the better the outcome. Why? Planning early gives you time to focus on organizing your financial records, increasing profits, diversifying your customer base, and generally making your business more attractive to buyers. It also gives you the flexibility to wait until the best time to sell (e.g. when the market is good).
As soon as you know you want to sell your business, it can help to think about the following:
Why you want to sell
Potential buyers will inevitably end up asking why you want to sell your business, but it’s also good to think about your motivations so you can figure out what you want to get out of the sale and avoid seller’s remorse. For example:
- Are you looking to retire? Take care of a personal matter? Diversify your investments? Are you overwhelmed or burnt out? Or not having fun anymore? Do you feel ill-equipped to take the business to the next level? Are you just ready for a new adventure?
- Who do you want to sell the business to: the buyer with the highest price? Whoever is most likely to help the business succeed? The best fit culture-wise?
- What do you want to do next? How much cash do you need for your future plans? Do you want to leave the business completely, or still be involved?
If your business is attractive to potential buyers
It’s also important to take a step back, take off your rose-tinted glasses, and figure out whether anyone would actually be interested in purchasing your business. To do this, it can help to ask:
- Does the business have a good brand reputation?
- Is it consistently profitable?
- Are your earnings repeatable?
- Is your revenue diversified?
- Are your gross margins and operating margins healthy?
- Do you have a loyal base of customers?
- Is your team dependable, knowledgeable, and loyal?
- Do you have a competitive advantage?
- Has the business been growing, and is there more room to grow? Do you have a strategy for future growth?
- Does your business have the right in-house infrastructure, systems, and processes? Do business operations run smoothly?
- Do you do everything? Can the business survive without you?
When you want to sell
Remember: selling your company can take a long time, so it’s important to figure out when you want to finalize the sale and work back from there. While owners tend to think it’ll take less than 5 months, many business brokers generally recommend preparing for a 6 to 11-month process, and other experts say it could take over a year.
And if you want to maximize your profit, be prepared to put in even more time. “Entrepreneurs who want to sell for more than book value—the value of their assets alone—should ideally devote as much as three to five years to getting their business in the best shape possible for sale,” writes Mark Abell, senior vice president, and SBA division director at NBH Bank in The Business Journals.
What you want to sell
Selling a business isn’t always as cut and dry as the buyer purchasing all of the business’s assets and liabilities. If you’re a C corporation or S corporation, there are generally a couple of types of sales you could offer.
In a stock sale, the buyer purchases all of the company equity, including assets and liabilities. This method is simpler, but you may fetch a lower price. In an asset acquisition, on the other hand, the buyer only purchases the assets they want. For example, they may want your intellectual property, brand name, and team, but refuse to assume liability for undisclosed or unknown debts. Buyers generally prefer asset acquisitions because they’re less risky and can offer tax advantages.
What your exit strategy is
Finally, it’s important to figure out your succession plan. In other words, identify who you’d want to take over the business’s day-to-day operations if you left the company and set them up for success with a business plan. This person won’t necessarily take over when you leave—if you find a buyer, they may want to take charge. However, having a plan can show buyers that you’ve been planning for your exit and aren’t just selling the business out of desperation. Plus, it’s just good practice if you do end up having to leave your business in a hurry.
Step 2: Assemble the right team
While you may be tempted to handle as much of the selling process as possible by yourself to save money, going at it solo could actually end up costing you. As there are many moving parts to a business, the process of selling one is also understandably complex.
Because of this, it’s hard to get right: according to The Exit Planning Institute (EPI), fewer than 30% of companies on the market will sell — likely because of owner mistakes that complicate the exit.
It’s also really hard to make sure the business runs smoothly and hits its revenue projects, objectives and key results (OKRs), and other goals while you’re interviewing buyers and poring over contracts.
A good team can handle the logistics of selling your business while you focus on running it. More importantly, they can ensure everything is done correctly — ultimately saving you time, stress, and money.
Here are a few people you may want on your team:
- Business valuation expert: determines how much your company is worth (and therefore how much you can realistically ask for).
- Business broker or agent: helps with a variety of tasks, from finding qualified buyers to ensuring privacy and negotiating. Having a broker can be especially helpful if you’ve never sold a business before and/or are looking for an outside buyer.
- CPA: helps clean up your financials and advises on the tax implications of different deal structures.
- Legal counsel: reviews offers, creates and evaluates relevant paperwork, makes sure you don’t disclose more than you should early on, and more. Note: If your lawyer doesn’t specialize in contract law, you may want to hire one who does for this process to ensure you don’t miss anything and have regrets down the line.
If you’re especially set on raking in as much money as possible, it may also help to speak to a specialist exit consultant, who can develop a plan that outlines the steps you should take to achieve various exit outcomes.
Strapped for cash? There are also a few free or low-cost options that can give you guidance and help plan your exit strategy:
Step 3: Get your financials in order
Next, it’s time to organize and clean up your financial books. This is important because a variety of people will likely look at them throughout the selling process, including valuation experts, potential buyers, and their teams, and you need to be able to provide accurate financial statements in a timely manner, or else interested buyers might move on.
Having organized records will also help you figure out how your business is doing and make it easier to determine how much you should ask for. Your financials are the clearest way to show the value of your business. Clean records can help you defend your asking price during negotiations, while disorganized or incorrect financial statements and tax records could send red flags and scare away potential buyers.
Finally, organizing and evaluating your finances is a great way to help you figure out what to work on as you prep your business for the sale. For example, if you notice 40% of your revenue came from one customer last quarter, you may want to diversify your client base.
To get started, work with your accountant to find key financial statements and fix sloppy books — going back at least three years. This includes:
- Business tax returns
- Monthly bank statements
- Income statements (make sure all income is accounted for)
- Cash flow statements
- Balance sheets
- Seller’s discretionary earnings
- Profit and loss statements
- Financial statements and projections
While you’re at it, you may also want to keep the following documents handy, as the buyer might ask for them as part of the due diligence process:
- Current lease(s)
- List of assets and liabilities
- Supplier and vendor contracts
- Customer data
- Insurance policies
- Employment agreements
- Customer contracts
- Patents issued
- Supplier/distributor contracts
Step 4: Spruce up your business
Just like many homeowners redecorate or take on small home improvement projects before putting their place on the market, you’ll want to make your business look as good as possible so you can ask for the highest possible amount.
The best time to sell your business is generally when your profits are increasing. As such, you may want to look for ways to increase sales, such as by boosting your marketing budget, setting up a referral program, or offering limited-time discounts.
Don’t neglect other parts of your business, either. Before reaching out to buyers, make sure your inventory is organized and your equipment is working well and up to date. If you own a storefront, consider revamping the facilities by painting, fixing your landscaping, and modernizing your decor. Additionally, make sure your online presence looks good. Many buyers begin their research process by Googling your business, so anything they find on your website and social media channels—and any reviews they find—could make or break you.
Step 5: Determine how much your business is worth
Pricing your business might be one of the trickiest parts of the selling process. While you may be tempted to shoot for the stars in an attempt to get as much money as possible, if your price is too high, you could scare away buyers. And of course, if your price is too low, you leave money on the table. This is why your best bet may be to price your business fairly.
Because it can be hard to think about your business objectively, many experts recommend getting it appraised by a third party. An independent valuation can protect both you and the buyer, as both parties know the price is fair. It also makes your asking price more credible, so the buyer may not try to negotiate as hard.
According to the National Federation of Independent Business, third-party valuations often cost between $3,000 and $7,500 and usually take 2-3 weeks. Typically, the appraiser will review your business’s overall financial health by looking at your books, the competitive environment, and market indicators. Depending on your business, they may conduct an interview and site visit as well.
Remember: this number could have a big impact on how much you ultimately end up selling the business for, so make sure you understand how they decided on the valuation, and if you disagree, don’t be afraid to ask questions. You know your business better than anyone, and it’s possible they made a mistake or overlooked a crucial detail during their review.
If you don’t get an independent valuation, it can help to think about your industry, similar companies, and pricing benchmarks when figuring out how much to ask for. For example, small businesses are usually worth 3-6x their annual cash flow, but a lot can depend on your financials, the current economic climate, and other factors. Additionally, buyers may care about specific details, such as your business strategy and leadership team.
There are also a few standard approaches you can take to value your business. Some common valuation methods include:
- Income approach: bases your company’s value on your projected future cash flow or earnings
- Market approach: compares your business to other similar businesses that have sold recently
- Assets approach: takes the book value of your business and subtracts any liabilities
- Seller’s discretionary earnings (SDE): multiplies your SDE (how much your business makes after nonrecurring and discretionary expenses) by a certain number (based on similar businesses)
- Multipliers approach: multiples your business’s monthly gross sales, monthly gross sales plus inventory, or after-tax profits by a certain amount (often industry ballparks).
Step 6: Find and vet buyers
Once you have all your financials in order and your business is in tip-top shape, it’s time to find some buyers!
You’ll notice we say buyers (plural). This is because you’ll want to find multiple interested buyers in case things fall through—not every negotiation ends with an agreement to buy, and not every pending sale closes.
FSBO vs. hiring a business broker
You can either find buyers yourself (this method is often called For Sale By Owner, or FSBO) or hire a business broker to help. Each has its own merits:
| Pros of FSBO | Pros of hiring a broker |
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If you choose to put your business on the market yourself, you may want to consider marketing your business online, as many people turn to the internet when they’re looking for a business to buy. Keep in mind that you may need to spend money to advertise your business; many sites charge a monthly subscription fee to list on their platform. However, it may be well worth the money if you can get your business in front of thousands of prospective buyers and shorten the process.
Using a business broker
On the other hand, if you want to sell to an outside party (i.e. you don’t have someone in mind to sell to), it may help to hire a business broker. Many brokers specialize in selling small businesses (those with less than $5 million in revenue) and can assist with numerous aspects of the process, including:
- Helping you find buyers by tapping into their network or marketing your business
- Valuing your business
- Preparing an offering memorandum (also called a prospectus). This is a quick overview of your business that can include a description of your product or service, the history of your business, date established, number of employees, an overview of the competition, your reason for selling, what’s included in the sale, and more. It’s often a buyer’s first insight into your business.
- Vetting buyers
- Ensuring confidentiality (sometimes they’ll create a “blind profile,” which is a one-pager that highlights your business without revealing its identity)
- Answering buyer questions and generally helping both parties through the process
To find one, it’s important to interview multiple brokers and ensure you can trust them and that they understand your business and industry. While you’re talking to them, discuss your expectations (e.g. if you don’t want to sell your company under a certain price point or want to sell by a certain date), ask to see their annual sales records, get proof of their certification, and make sure their approach is realistic. Generally, finding one should take around one or two weeks.
However, while there are many benefits to hiring a broker, keep in mind that they work on commission. Of course, this might be worth it if they can negotiate a better deal than one you would’ve arranged yourself, but it can be a significant cut.
Generally, the fee ends up being around 5-10% of your sale price. Many brokers either charge a flat fee or calculate their total fee using the Lehman Fee structure, where they charge a certain percentage on the first million of proceeds, a smaller percentage for the second million, and so on. They may also request an advance on their fees to cover costs and ensure you’re committed.
Vetting buyers
Potential buyers will do a lot of due diligence around you and your company—and you should do the same.
Not every buyer has good intentions, so vet each person closely and don’t waste time on anyone who’s just looking for information or those who simply want to buy a business “someday.” This is especially important because you’ll have to provide a lot of sensitive business information, so you want to make sure you can trust the person and think the deal might actually pan out.
Before talks get too into the weeds, have each interested buyer sign a confidentiality agreement to protect yourself legally, and don’t let your conversations turn into one-sided interrogations about you and your company. Instead, vet them in a few different ways, including:
- Business-wise: What’s their educational background? Do they have relevant business experience? Can they lead your team? Do they understand your business, and can they help it grow? Why are they interested in your business specifically? What does their time frame look like?
- Monetarily: Do they actually have the funds to buy the business? What are their sources of financing? Don’t base your decision on a hypothetical offer. Prequalifying buyers is essential because getting approved for popular financing options such as SBA loans can be difficult, and you don’t want to end up with a buyer who can’t secure financing and consequently has to withdraw their offer.
You might have a lot of these conversations, so to keep things organized, keep a separate folder for each potential buyer where you can store their contact information, notes for each conversation, and any written agreements and paperwork.
Step 7: Perform due diligence and negotiate with the buyer
Due diligence is when interested buyers closely inspect your company to determine whether they want to buy it. Savvy buyers will come in looking for red flags, so be prepared to answer a lot of questions about your business.
Once the buyer decides to make an offer (thanks to your organized financials and spruced-up look and feel), you can probably expect them to negotiate. This is normal, but it doesn’t mean you have to accept a lowball offer. Remember: part of the reason you got your books in order was so you could prove your worth, so don’t be afraid to defend your price if it’s reasonable.
Additionally, keep in mind that you aren’t just negotiating on price. The buyer might also want to discuss other details, such as how long you’ll stick around to consult, the payment structure, and the type of sale.
According to the SBA, there are two main ways of permanently transferring ownership of your business: an outright sale, where you transfer ownership and receive payment immediately, or a gradual sale, where the buyer finances a long-term payment plan.
Since businesses are big purchases, you generally shouldn’t expect an all-cash offer. In fact, both the bank and the buyer may want you to provide a portion of the financing—so the buyer doesn’t have to borrow as much from a traditional lender—and so you have a vested interest in the business’s success.
Don’t worry, seller financing doesn’t involve you lending money to the buyer; they are buying something from you, after all. Instead, you allow the buyer to pay off a portion of the business over time by accepting staggered payments.
Like many other decisions you’ll make throughout the selling process, seller financing has its own pros and cons:
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If you do agree to seller financing, there are a few ways you can protect yourself:
- Ask for a sizeable down payment. In general, you may not want to finance more than 20% to 50% of the sale price.
- Make sure your contract is airtight and includes a promissory note, which is a written promise by the buyer to pay you according to a certain schedule.
- Ask for a personal guarantee or collateral.
However, you should only agree to seller financing if you’re comfortable taking the risk. Don’t let the buyer pressure you or claim they can’t get any other financing. If you don’t trust you’ll get your money back, it may be worth talking to another buyer.
While it can take a while to come to an agreement (negotiation can take around a month), try to keep things moving forward. Time can kill deals, and the buyer may back out at the last second if a key leader at your company resigns, you lose a big customer, or something completely out of your control (like a pandemic) occurs.
Once you and the buyer agree to the general terms, ask for a letter of intent (LOI), which is a nonbinding document that outlines everything you’ve discussed (price, general terms and conditions, etc.) and says you both want to proceed. This, along with a good faith deposit you can ask from the buyer, can help improve the likelihood that the deal will close.
Step 8: Sign the closing documents and finalize the hand-off
When you and the buyer agree on all the details, it’s time to close the deal! But don’t spend your proceeds just yet—this final step can take months and involves a number of moving pieces.
First up: creating and agreeing on everything in the business purchase agreement (also known as the asset purchase agreement, or APA). This is the legal contract for the sale and includes the final terms of the deal, including the names of the buyer, seller, and business, final purchase price, payment terms, how long you’ll advise the new owner, and everything included and excluded from sale. Since there are few ways of turning back after both parties sign this agreement, you may want to have your broker or legal counsel create it or at least review it. Additionally, you may want to ensure the agreement says the buyer will pay you a portion upfront so you know they have the money and you can pay for all of the transaction expenses (broker commission, taxes, etc.).
As part of the agreement, the buyer may also have you sign a non-compete, which states that you can’t start a new business that competes or take customers away from the business you’re selling.
After you and the buyer sign the business purchase agreement, the funds go into escrow while all of the other closing docs are signed, including (but not limited to):
- Bill of sale: a legal document that recognizes the sale of the business and transfers the ownership of assets
- Corporate resolution: a written recognition that your board of directors authorizes the sale
- Asset acquisition statement (Form 8594): a tax form that tells the IRS the buyer’s depreciable basis in the assets transferred and how you (the seller) determined the gain or loss on the sale
- Any applicable forms to transfer leases, vehicles, intellectual property, titles, loans, patents, trademarks, etc.
- Security agreement: a document that allows you to retain a lien on the business until the buyer pays you back in full
Once all the closing documents are signed, the funds are released from escrow to you, and you handle any final business-related tasks, such as telling employees, notifying creditors and other relevant points of contact, canceling anything not being assumed by the buyer (e.g. insurance, business lines of credit, etc.), and closing your employer ID number with the IRS.
Of course, this isn’t usually the end of your story with the business. If you’ve agreed to stay on with the company for a certain amount of time, be prepared to show the new owner the ropes, answer a ton of questions, and generally help set the company up for success for its next chapter without you at the helm.
Bottom line
Selling your business will likely be one of the hardest and most complicated decisions you’ll make. However, don’t give up, get tempted to take shortcuts, or begin slacking on your business even if it takes a long time. If you rush the process, you could miss key details and end up with the short end of the stick. And if you neglect your business to focus on wooing buyers, it may begin struggling, and you may have trouble building interest.
You probably can’t be completely unemotional about the process—after all, you’ve spent years building your company. But by preparing early, you can set everything up for success and reap the rewards while you enjoy your well-deserved next adventure.
