7 steps to selling a small business

 

How to Sell Your Small Business

Reviewing these seven considerations can help you build a solid plan and make negotiations a success.

1. Reasons for the Sale

You’ve decided to sell your business. Why? That’s one of the first questions a potential buyer will ask.

Owners commonly sell their businesses for any of the following reasons:

• Retirement

• Partnership disputes

• Illness or death

• Becoming overworked

• Boredom

Some owners consider selling the business when it is not profitable, but this can make it harder to attract buyers. Consider the business’s ability to sell, its readiness, and your timing.

There are many attributes that can make your business appear more attractive, including:

• Increasing profits

• Consistent income figures

• A strong customer base

• A major contract that spans several years

2. Timing of the Sale

Prepare for the sale as early as possible, preferably a year or two ahead of time. The preparation will help you to improve your financial records, business structure, and customer base to make the business more profitable. These improvements will also ease the transition for the buyer and keep the business running smoothly. 

3. Business Valuation

Next, you’ll want to determine the worth of your business to make sure you don’t price it too high or too low. Locate a business broker to get a valuation. The Broker will be able to give you a price range the business will likely sell for. For larger business it may be a good idea to get a full business valuation. The document will bring credibility to the asking price and can serve as a gauge for your listing price.

4. Should You Use a Broker?

Selling the business, yourself allows you to save money and avoid paying a broker’s commission. It’s also the best route when the sale is to a trusted family member or current employee.

In other circumstances, a broker can help free up time for you to keep the business up and running or keep the sale quiet and get the highest price (because the broker will want to maximize their commission). Discuss expectations and advertisements with the broker and maintain constant communication. 

5. Preparing Documents

Gather your financial statements and tax returns dating back three to four years and review them with an accountant. In addition, develop a list of equipment that’s being sold with the business. Also, create a list of contacts related to sales transactions and supplies, and dig up any relevant paperwork such as your current lease. Create copies of these documents to distribute to financially qualified potential buyers.

Your information packet should also provide a summary describing how the business is conducted and/or an up-to-date operating manual. You’ll also want to make sure the business is presentable. Any areas of the business or equipment that are broken or run down should be fixed or replaced prior to the sale. 

6. Finding a Buyer

A business sale may take between six months and two years according to SCORE, a nonprofit association for entrepreneurs and partners of the U.S. Small Business Administration (SBA). Finding the right buyer can be a challenge.

Once you have prospective buyers, here’s how to keep the process moving along:

• Get two to three potential buyers just in case the initial deal falters.

• Stay in contact with potential buyers.

• Find out whether the potential buyer pre-qualifies for financing before giving out information about your business.

• If you plan to finance the sale, work out the details with an accountant or lawyer so you can reach an agreement with the buyer.

• Allow some room to negotiate but stand firm on a price that is reasonable and considers the company’s future worth.

• Put any agreements in writing. The potential buyers should sign a nondisclosure agreement (NDA) to protect your information.

• Try to get a good faith deposit with the signed purchase agreement.

You may encounter the following documents after the sale:

• The bill of sale, which transfers the business assets to the buyer

• An assignment of a lease

• In the event the seller is carrying a note you will need a security agreement, which has a seller retain a lien on the business

In addition, the buyer may have you sign a non-compete agreement, in which you would agree to not start a new, competing business and woo away customers.

Note: A business broker often charges an average of 10% for businesses under $1 million; while that may seem steep, the broker may also be able to negotiate a deal that is better for you than the one you would have arranged by yourself. For businesses over $1M a sliding scale such as a Double Lehman is often used. This runs from 10% on the first million, follow by 8% on the next million, then 6%, 4% and finally 2%.

7. Handling the Profits

Take some time—at least a few months—before spending the profits from the sale. Create a plan outlining your financial goals and learn about any tax consequences associated with the sudden wealth. Speak with a financial professional to determine how you want to invest the money and focus on long-term benefits, such as getting out of debt and saving for retirement.

How to Sell a Business FAQs 

How Do You Sell a Small Business Without a Broker?

While many people would like to avoid the commission a business broker may charge, the risks of selling on your own may outweigh the loss of money. But if you’re going to go it alone you will still need to hire experienced accountants and lawyers to assist you in the sale.

How Much Does It Cost to Sell a Business?

If you go through a business broker, and your business is under $1 million, the broker’s commission is likely 10% to 12%. Other fees that can crop up include attorney fees, marketing fees, the costs of making any cosmetic or more substantial upgrades to your business so as to make it more sellable. There are also fees that may come up if you are transferring a lease to the new owner of your business.

How Do You Sell a Business to a Competitor?

The process of selling to a competitor would involve the same steps as selling to a company that is not a competitor. However, selling to a competitor is fraught with risks. Turning over sensitive information such as pricing information, operating procedures, employee information and so on can leave you extremely exposed in the event the deal does not close.

How Do You Sell a Business Online?

Selling a business involves negotiations, discussions, and a lot of leg work. If it’s not possible for all this to occur in person, then certainly using services like Zoom or Skype to hold business meetings with potential buyers digitally is possible.

How Do You Sell a Business Quickly?

Even if you are selling to a close family member or employee, rushing through the sales process is not advised. However, if a relatively quick turnaround is needed, hire a business broker to speed up the proceedings.

How Do You Sell a Franchise Business?

You’ll need to work in conjunction with your franchiser, as they will need to determine if the new buyer is appropriate. Plus, that new buyer will need to sign a franchise agreement with the franchiser.³ There are a variety of fees and rules associated with owning or selling a franchise that can be found in the FTC’s compliance guide. 

How Do You Sell Your Share of a Business?

Selling your share of a business to your other partners or partner is a common ownership transfer method, particularly for small businesses. Having an agreement in place with your partners ahead of the sale will help smooth the transition, increasing the likelihood that both the staying and exiting partners’ benefit.

The Bottom Line

Selling a business is time-consuming and for many people, it’s an emotional venture. A good reason to sell or the existence of a “hot” market can ease the burden, as can the help of professionals.

 

Quorum Business Advisors is a Florida based Business Broker. We offer free confidential initial consultations to Business Owners interested in exploring an exit strategy. If you have started to think about selling your business now is the time to contact us.