How to Sell A Business in Five Steps (Complete Guide)
If you’re looking for the best broker to help you sell your business, my top choice would be Business Exits.
The great thing about business is that having a small business idea and executing it over the long term can make the business owner a lot of money.
Of course, this might be easier said than done.
A successful business owner ensures the products or services are high quality, promotes their business using the best marketing strategies, and understands the financial aspects involved.
But what if you want to take things one step further and eventually sell your business?
However, you still need to do a few things to make sure that the sale goes smoothly – not all of them do.
Selling your business can be a complex process with multiple steps, lots of uncertainty, and a lot of paperwork.
In this article, I will share with you the five steps you need to take to successfully sell a business, guiding you through the process from start to finish.
Let’s get right into it.
The following are the five key steps you need to take when selling your business.
The number one reason companies don’t sell is they have poor or weak business financials.
This means that you have to pay your taxes and show a profit.
Having at minimum the past three years’ financial statements, including tax returns, profit and loss, and balance sheet, is crucial.
Financial information about your business is the foundation of the sales process and is crucial for any valuation or future negotiations.
If you intend to sell your business, I recommend contacting your accountant and tax professional as soon as possible to get all the key items cleaned up.
The more information you can gather, the better.
A broker can also help you determine your needs, however, having a cadence of completing your financial records every month is a good starting point.
While getting your hard numbers and legal documents together, you should also be looking to create documents and brief guides as to how the business works.
- What makes your business so successful?
- What are some of the standard operating procedures?
- What do you think the strengths and weaknesses of the company are?
These are things to both think about now and write about.
And when getting everything together, also give thought to the presentation of your data.
Prospective buyers might be looking at some of this information in the future during the due diligence process, so make sure the information is easy to understand, easy to read, and does not provide potential misunderstandings about you or your business.
No matter what type of business you have, you will likely be asked for some form of documentation.
Ensuring you are well-prepared as part of your exit plan will pay off down the road.
You might have done some math and estimated what your business is worth.
You might even think your business is priceless.
Yet if you’re going to put it on the market, you need to have a plan, and you need to have a starting price or asking price range.
You need a professional valuation if you’re hoping to get the most for your business, and I promise it will be worth it.
After all, your business is worth what a willing buyer will pay for it.
In general, a professional evaluation will involve a specialist working with you to go through your business profitability and the overall running of your business.
They will look at financial information, performance over time (especially the last two to three years), marketing strategies, and your team.
If it’s relevant to business, these professionals will look at it.
Once they have finished their process, they will then reveal the company’s value.
This means you will receive the value (or range) your business is worth and what you could sell it for.
When selling, you don’t have to necessarily ask for this number (you could go higher or lower as you wish), but it might affect the timing of selling your business.
Handling all this process alone is a big task and can be overwhelming if you have other responsibilities on your plate.
Therefore, you will want to bring in a group that can help.
In this case, that’s a business broker or merger and acquisitions specialist’s responsibility.
I consider them practically necessary and worth every penny you pay them in commission.
They will help ensure you get the best possible price and a prospective buyer.
So what can you expect a broker to do?
Their usual responsibilities include but are not limited to:
- As a valuation expert, the broker can provide a business valuation, which you can compare with the one you already had.
- Organize due-diligence efforts to ensure the sales go smoothly. This is a vital part of the process, and you should know many deals fall apart due to a failure in this step.
- Maintain company confidentiality through a confidentiality agreement.
- Make the introduction with potential buyers that are worth talking to.
- Promote the business to the right groups of potential buyers, ensuring only qualified buyers get in touch.
- Aid with agreement negotiations when it comes to interested buyers.
- Aid with connecting people with financing and funding resources.
- Work with both parties’ lawyers and accountants (CPA) to ensure a smooth deal and transition.
- Create the best deal possible where all parties can walk away pleased.
- Explain the metrics that have the most influence on the value of your business.
- Ensure any intellectual property is transferred over and part of the selling process.
As a business owner, know that not all brokers are equal, and it can be hard to navigate the space and search for the right one when you have so much on your plate, to begin with.
Therefore, here are some of the top brokers you should look at first:
- Businessexits.com – They are ideal for businesses with $500,000 to $20 million in yearly profit looking for an exit strategy.
- Bizbuysell.com – They are best for companies with less than $500,000 in annual profit.
- HL.com – They are best for companies with over $20 million yearly profit.
As for paying them, how much can you expect to pay as a brokerage fee?
It depends on the size of your business as measured by revenue – small business owners would pay differently to those with a medium or large company.
A business that brings in $1 million in yearly revenue can expect to pay a 12-15 percent commission.
A company with more than $25 million in revenue can expect about 3-5 percent commission.
Since you may not technically need to work with a specialist or professional here, you might be asking yourself why you should.
Wouldn’t it be better to save the expense?
You could try to teach yourself those points and references, but nothing will be a substitute for years of experience and a team of dedicated professionals that have sold similar businesses before.
You want the most accurate numbers possible, or you will be considerably disadvantaged.
Businesses should seek to work with someone who can do professional business valuations.
Much of the business’s net worth is in the company and its growth potential.
A professional valuation can determine what this is worth to a potential buyer.
No matter how hard you want to sell your business, it will take a great buyer to pay top dollar.
And you need to find a serious buyer able to provide a serious offer.
No matter how good a buyer seems in terms of personality, you need to ensure they can have the money required, or they will just be wasting your time.
Your broker will help with this, and each situation might be a little different given the circumstances surrounding your business, but in general, you should be asking the following:
- Does the potential buyer have the funding to buy your business right now, or are they pre-qualified to receive it?
- Does your buyer know what they are getting into and have industry experience?
- What are their plans for your business? This question becomes more critical if you care about what happens to your business after you sell it.
- What is their intended timeline for buying? You do not want to be strung along. Often potential buyers who take a long time do not go through with the deal. A buyer should take a reasonable amount of time, sure, but be suspicious of anyone who isn’t prepared and provides answers that are too vague.
Let your broker screen initially, but you should also be part of the process.
Tell them what you are looking for and what is essential.
A good broker will listen to you.
Once you get good potential buyers, it’s up to you and your broker to negotiate starting points and narrow down the options.
After you find a buyer, your broker will be working to finalize the terms, close the deal, and transfer the business.
It will take work, but it will be worth it.
Now is also the time to put in extra time and attention.
Many deals fall through at this stage.
This is also when you want to work with the lawyers (ideally a sales lawyer specializing in business) and brokers even more extensively.
Every word and phrasing can matter; the final sale contract could easily go for more than 100 pages.
You want help when it comes to that, and the best help you can find.
A good mergers and acquisitions lawyer is a must-hire for this part of the process.
The documents or sections can include but are not limited to:
- Various purchase agreements
- The right bill of sale
- Warranties and reps
- Indemnification clauses
- A complete list of assets
- Non-compete agreement clauses and non-disclosure agreements
- Guidelines for website use and domain names
- Transition time and work agreements
After the contract process and any final negotiations are done, all that is left for the parties is to sign the papers and move the business assets.
There will usually be an escrow process, and there will be papers to sign.
The deal is done once the escrow has moved forward and everything has been confirmed.
Depending on the arrangement of the sale of your business and the contracts, you may be helping with the transition period for a certain period or a number of hours.
This can all be up to you, though the terms might affect the sale and final price.
Once these terms are fulfilled, you will officially be out of your old business and completely free to do as you please.
There is no one-size-fits-all answer to this question, as the factors contributing to a startup’s success vary greatly from business to business.
However, some key things that all successful startups have in common include a solid and passionate team, a well-defined target market, a unique value proposition, and a clear vision for the future.
Additionally, successful startups are typically very adaptable and able to pivot quickly in response to market or industry changes.
The sale price of a business is usually based on a multiple of the company’s earnings or revenue.
The industry is also considered, as businesses in some sectors are typically valued at higher or lower multiples than others.
For example, a real estate company might be valued at a multiple of its revenue.
In contrast, a tech company might be valued at a multiple of its earnings before interest, taxes, depreciation, and amortization (EBITDA).
Entrepreneurs should work with a broker or valuation specialist to determine a reasonable sale price for their business.
In most cases, the liabilities of a business are assumed by the buyer when the company is sold.
However, there are some instances in which the seller may agree to assume certain liabilities, such as outstanding debts or leases.
Discussing this with the buyer beforehand is essential to ensure that both parties are on the same page.
When business buyers purchase an existing business, they typically also acquire the company’s customer base.
However, it is vital to have a non-compete agreement in place to protect the customer base from being poached by the seller or any other third party.
An appraiser will likely consider the company’s cash flow when determining the business’s value.
Businesses with strong growth potential may be valued higher than those with more modest growth prospects, even if they have lower cash flow levels.
Lenders will also be interested in a company’s cash flow when considering financing a business purchase.
In most cases, no.
The new business owner will likely want to keep the employees on board to maintain continuity and avoid disruptions to the business.
However, there may be some instances when the new owner decides to lay off some or all of the employees.
While key employees may be essential to the business, it is ultimately up to the new owner to decide whether or not to keep them on.
There is a lot to love about selling your business and the new horizons this can bring you to, but I will be the first to admit that it can be confusing to those who haven’t been through the process before.
Whether you have a small business that you’re looking to sell or a large one that you want to move away from, knowing who can help you and what the process looks like is important.
Getting a prospective new owner, negotiating a business sale, and closing the deal are all essential steps you will need to go through.
It might seem like a lot to do when selling businesses, but if you take it one step at a time, the process won’t be nearly as daunting as it seems at first glance.
I hope this article has given you a better idea of what to expect and who you should be working with to make your dreams a reality.
Further reading on AdamEnfroy.com: If you’re still in the initial stages of business, consider that the best business credit cards for startups can help you get off on the right foot.
In addition, getting a business loan can be the difference between success and failure for small businesses.
Having the proper knowledge in these areas will give you the best possible chance for success in both the day-to-day running of your business and the eventual selling when the right time comes.