How to Sell Your Small Business
You’ve poured blood, sweat, and tears into your business. When it’s time to sell, you deserve to be compensated well.
When you understand all the moving parts behind a business sale, you can worry less about the process and focus more on the outcome: getting a fair price for all your hard work.
First, we’ll look at the basic types of business sale, and the professionals you’ll need to hire to make it happen. Then, we’ll walk step by step through the process of selling.
Selling your business vs. liquidating your business
It’s important to understand the difference between selling and liquidating your business.
Put simply, liquidating is what you do when you’re ready to go out of business. Selling is what you do when you transfer ownership of the business to someone else.
Liquidation makes sense if your business is unsustainable, or has major solvency issues.
When you liquidate, you settle outstanding debt, collect outstanding receivables, and release any employees. Then, you sell your assets, which might take the form of real estate or equipment.
The goal is to salvage as much as you can from the business, and then legally dissolve it and move on to your next adventure.
When you sell your business, you sell your assets. However, in contrast with liquidation, you also sell the goodwill value of your company.
Your goodwill value is the somewhat intangible—but revenue-generating—assets that allow your business to proceed. This could take the form of client accounts, a regular customer base, a good reputation, or a competitive edge in the market.
Together, the assets and the goodwill value your company combine to create its going concern value. When you officially evaluate your business, a dollar amount is assigned to your business’s going concern value.
Who to sell your business to
You can sell your business to a variety of individuals or entities. There are pros and cons to dealing with each.
Selling your business to an individual on the market
This is like selling your house on the market. You put it out there, and see which individual shows the most interest (for the highest price.)
Pros: Since your business is up for sale on the open market, you have the highest chance of finding someone willing to meet the conditions of your sale—for instance, an all-cash closing.
Cons: To sell on the open market, you will likely need to hire a broker who charges commission.
Selling your business to a family member
Roughly one-third of business sales are between family members. This can take the form of handing off your business to the next generation of owners.
Pros: As the business gradually changes hands and your family member takes over, you’ll still have some say in how the business is run. Also, a change of hands between family members means a smoother transition for staff and clients.
Cons: It’s unlikely you’ll be able to get the highest possible asking price for your business when selling to a family member.
Selling your business to your partners
If your business operates as a partnership, you have the option of selling your shares to your partner. Most likely, when you formed a partnership, you signed a buy-sell agreement. This document outlines the price and procedure you need to follow to make the sale.
Pros: Following a predefined path for making the sale requires minimum effort on your part, and has a low impact on staff and clients.
Cons: Even as the buy-sell agreement makes for a quick change of hands, you may find yourself stuck with a price that seemed attractive when you signed the contract, but has become less appealing as your business has increased in value.
Selling your business to an employee
A trusted employee who’s great at their job and knows your business inside and out could make the perfect buyer.
Pros: You can plan the sale well in advance. The first step is setting up a legally-binding partnership with your employee. Then, you’ve got plenty time to arrange the hand-off, and extract yourself from daily operations, before your employee takes over completely.
Cons: As with selling to a family member, selling to an employee is unlikely to get you top dollar for your business.
Selling your business to multiple employees
You may be able to sell your business to qualified employees, if you have an Employee Stock Ownership Agreement (ESOP) in place.
Pros: Taking advantage of existing relationships with employees means you don’t need to put your business on the market. Existing employees are also more likely to run it successfully than a buyer you’ve never met before.
Cons: The ESOP needs to be put in place well before you make the sale. Setting it up demands extra paperwork and professional help.
Selling your business to another business
Large businesses and private equity groups buy companies as investments. In that case, they’re not looking to set it up with a new owner, but to use parts of your business—market share, competitiveness, profitability—to benefit a larger, similar business in their portfolio.
Pros: You’re more likely to secure a better selling price from another business than from individuals, and get an instant payout.
Cons: Depending on the sale terms, you may need to continue managing your business for a fixed period during the transition.
The professionals you need to hire
While it may be tempting to try to sell your business single-handedly, it’s almost impossible to do without a little help from your friends—”your friends,” in this case, being paid professionals.
At minimum, you’ll need to work with an attorney and an accountant.
An attorney can help you prepare the legal documentation for the transfer of assets, and make sure nothing you’re doing is likely to get you sued.
An accountant prepares the financial records you need to prove to prospective buyers your business is worth investing in.
Then, you should consider hiring an appraiser. For a fee—typically $3,000 to $7,500 for small businesses—an appraiser will tell you how much your business is worth.
An appraiser will survey:
- How much money your business owes
- How much others owe your business
- Your business’s inventory, and other assets
- Your receivables and sales
Then, they’ll take into account the condition of the market, and your business’s place in it, to determine an asking price that will be attractive to buyers while also getting you the price you deserve..
However, you won’t need to hire an appraiser if you hire a broker. A broker will both appraise your business, and put it on the market. Typically, they’ll charge 5–10% of the commission price. They find buyers for your business by preparing a prospectus for it, listing it on marketplaces, and tapping into a large professional network.
Finally, before putting up the “For Sale” sign, consider hiring a business consultant. Someone with experience in your industry can tell you ways to improve your business before making a sale so it will look more attractive to potential buyers.
How to sell your business, step by step
While every entrepreneur’s journey is different, these are the steps you can typically expect to take as you sell your business.
Step 1: Determine your commitments
While you’re preparing your business for sale, it shouldn’t suffer. Selling takes time and energy, and getting too caught up in the process has the potential to undermine your ability to keep your business running smoothly.
Chart out in advance what you’ll need to do to sell your business. For instance, will you be chasing outstanding invoices? Are you going to be digging through your back office for financial records? What sorts of improvements will you make to your business to make it more attractive to buyers?
Even if it’s hard to determine *to the hour* how much time you’ll need for each task, figuring out your commitments will help you get your priorities straight, and plan what kind of professionals you need to hire.
Step 2: Hire professionals
If you don’t have an attorney or an accountant to help with the sale, now is the time to find them.
Outside of that, it’s up to you to determine how much help you need from appraisers, brokers, or consultants.
Once you’ve found and contacted them, any of these professionals should be willing to sit down with you for a free consultation. Here are some useful questions to ask an appraiser, a broker, and a consultant.
Step 3: Make improvements to your business
Before selling, invest in improving your business’s profitability and the efficiency of its day to day operations. This will help you get the biggest sale price possible. The changes you make will depend on your specific business, but here are some ideas to get you started.
Put on a fresh coat of paint
If you have a brick and mortar location, simple updates—new fixtures and furniture, or even a (literal) fresh coat of paint—can help your business look more desirable to potential buyers.
Smooth out the operations
Your business operating system (BOS) is the rulebook for how your company runs and how employees work together to achieve goals. A BOS that’s disorganized or poorly implemented doesn’t look good, and hurts the profitability of your business. Replace it with a new system, or revise your current one to make it more efficient.
Sell, sell, sell
Focusing on boosting sales in the months or even years before you sell your business will make it look more attractive to buyers. This is especially the case with individual buyers—as opposed to organizations—who may be looking to benefit from the immediate cash flow that comes with buying a high-revenue business.
Diversify your client list
If more than 20% of your business consists of a single client, you could be at risk of giving buyers cold feet. After all, if that client decides they don’t like the new owner and decides to churn, it will put a huge dent in the profitability of your business. Leading up to a sale, try to take on new clients and diversify your portfolio, so this is less of a risk.
Step 4: Organize your financials
When it comes to financials, prospective buyers want as much transparency as possible. You’ll need at least three years of clean financial statements to present to prospective buyers. Make sure that all income is accounted for.
You should also make sure you have a bookkeeping solution in place, so you can guarantee the new owner ongoing, up-to-date financial info.
Finally, if you have any assets on your business books that you’d like to keep for private use—such as vehicles or equipment—be sure to transfer them off the books. These assets need to be legally transferred into your possession, so they’re not falsely recorded as belonging to the business you’re selling.
Step 5: Set your sale price
Does your business rely on proprietary information or specialized knowledge? If so, you’ll get the most realistic valuation from an appraiser or broker.
If you’re determining your own asking price, you should generally plan to set it at one to four times the seller’s discretionary earnings (SDE).
The SDE consists of:
- Your business’ annual net income before taxes
- Money your business makes from investments
- Depreciation and amortization of business assets
- Your personal compensation and benefits
- Non-recurring expenses.
The number by which you multiply the SDE—one to four—is determined by the current state of the market, your business’s competitiveness, and other factors. These are hard to pin down, but a qualified business consultant can help you figure out your SDE multiplier.
Step 6: Get your paperwork in order
Besides financial records, you need to be certain legal documents to be prepared before you make a sale. The most important is the asset purchase agreement—a legal contract for selling your business’s physical and intellectual property.
This document typically runs 25–50 pages in length, and draws on your financial records. Often, the asset purchase agreement will also list your obligations as former owner. Most commonly this means staying on with the business for a set period, to consult with the new owner.
Preparing one of these documents is a time-consuming task, which is why it’s important to hire an attorney who can handle it for you.
Step 7: Prepare a selling memo
Your selling memo is the document you use to give a prospective buyer all the information they need about your business so they can consider making a serious offer.
Your selling memo will include:
- An overall description of your business
- Information on your location
- Your business’s strengths
- An overview of your competitors
- A description of your products/services
- Information on your day-to-day operations
- Your marketing plan
- Key employees and managers
- Growth projections
- Potential buyer concerns
- Financial information
- Your asking price and terms of sale
If you hire a broker, they will prepare your selling memo for you.
Step 8: Put your business on the market
One major challenge you face when advertising your business for sale is maintaining confidentiality. If clients or employees find out you’re planning to sell, they may get skittish. And competitors could interpret your decision as a sign of weakness, and take advantage of it.
That’s why it’s usually wise to hire a broker. Not only will they have a large network to draw on, they’ll know how to discreetly approach potential buyers.
However, in the event you do decide to sell your business without help from a broker, online services have made doing so easier than it once was.
Step 9: Negotiate the sale
When a buyer is ready to purchase your business, they’ll submit a letter of intent to purchase. This document is non-binding; either you or the buyer can back out at any time.
It’s rare for a buyer to back out, though. By this point, they’ve already invested significant time in researching your business and putting together an offer.
Now, you may either accept the offer, or enter into negotiations with the potential buyer. Negotiating the sale of your business is its own special art form, and you may want to draw on advice from a business consultant during the process.
Step 10: Finalize the sale
The sale of your business is completed when you and the buyer sign the asset purchase agreement prepared by your attorney, and any other supporting documentation that may be required depending on the specifics of your business.
What’s your next step after you’ve sold your business? Literally whatever you want. With all that new cash, you might even want to turn the tables and buy a business of your own.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.