How to Sell Your Business
Kody Wirth | Oct 29, 2023
Selling a business is as complex as starting one. If you want to do it right and maximize the value of your business, you must take specific steps.
This article will cover what to do before, during, and after the sale to ensure you’re legally covered and have a plan to exit gracefully.
*Disclaimer: All content in this guide is intended to be general information, and nothing constitutes legal advice.
1. Know why you’re selling
Understanding your motivation for selling not only shapes your approach but can significantly influence the outcome of the sale. Potential buyers will likely ask why you’re selling, and you need a good answer.
It usually comes down to one (or a few) of the following reasons:
- Retirement: Often planned well in advance, retiring business owners are typically concerned with ensuring continuity and may still have some involvement in the business.
- Burnout: Sometimes, you simply hit a wall as a business owner and want an exit.
- Market conditions: It’s a good time to sell a home when market demand increases. The same can be said for businesses.
- Financial need: Facing a cash crunch? Before jumping to sell, explore other avenues like business loans or investors. Selling under pressure might not provide the best deal.
- Strategic move: It’s not always about selling to leave your business, sometimes it’s about pursuing growth. The right buyer can bring specific resources and expertise to take your business to the next level.
- Personal reasons: A desire for a more stable work-life balance, a death in the family, changing career preferences, etc., are all perfectly understandable reasons to explore a sale.
How to know when to close and start over
There are clear signs that your business can’t survive. Learn how to identify them and close or sell your business before it’s too late.
2. Compile financial statements and tax returns
Organized and strong financials will pull a lot of weight in convincing prospective buyers of the value of your business. Your financials tell the story of your business and provide a glimpse into profitability and potential. It’s not all that different from pitching to investors when pursuing funding.
When preparing to sell, your financials will be under the greatest scrutiny. You’ll likely need to provide at least the last 3-5 years of data. To ensure everything is correct, consult a licensed accountant or financial advisor to review your financials and tax returns. The last thing you want to do is have gaps in reporting.
If you’ve written a business plan, you have already addressed this information and may just require a small update. If you haven’t, use the one-page business plan format to quickly create a brief summary.
3. Get a business valuation
A professional valuation is the process of determining the economic value of a business. You can do this yourself, but it will be easier and more credible if you hire a professional appraiser.
An appraiser will evaluate:
- Financial statements
- Tangible and intangible assets (i.e. intellectual property)
- The strength and diversity of your customer base
- Efficiency of operations
- The management team’s capabilities
They will also factor in external market conditions and industry trends to finalize the estimated value of your business. This number or range can be used to set the sale price for your business
Rule of thumb business valuation explained
This valuation method leverages common sense and experience to provide you with an approximation of your business value. It can be a great option to use before hiring a professional.
How to increase the value of your business before selling
If you’re worried that your business isn’t as valuable as it could be, focus on improving cash flow, expanding your reach, and strengthening relationships.
4. Hire a broker
Hiring a business broker or investment bank can significantly streamline the sale of your business. They will guide you through the complexities of the sales process, handle paperwork, and ultimately help you land the best deal for buyers and sellers.
Here are the services a broker should provide:
- Market analysis: Assess the value of your business in the current market.
- Marketing: Promote your business to potential buyers through various channels.
- Screen buyers: Conduct due diligence to ensure potential buyers are serious and financially capable.
- Aid in negotiations: Represent your interests to get the best deal.
- Paperwork: Manage the extensive documentation involved in selling a business.
- Close the sale: Facilitate the final steps to ensure a smooth transition.
While hiring a good broker isn’t necessarily cheap, it will save you time, help you avoid mistakes, and ensure the transaction goes smoothly. If you’re transitioning ownership to a family member, employee, or other trusted party, you could do this yourself. However, you must involve a lawyer to confirm that everything is done correctly and is legally binding.
Tip: When hiring a broker, be wary of those who demand large upfront fees, make over-optimistic valuations of your business, or lack references from previous sales.
5. Find a buyer
Ideally, your broker will promote your business and seek out buyers for you. However, even with this support, identifying the right buyer and finalizing a sale can still take months or even years.
To keep the process moving and ensure you don’t waste your time, here are a few best practices to follow:
- Leverage your network: Sometimes, the best leads come from within your existing professional network. Talk to industry peers, suppliers, and even competitors.
- Use multiple channels: Don’t rely on one promotional method. Use business-for-sale websites, industry publications, and social media to cast a wider net.
- Prepare an information packet: Create a concise, detailed document about your business. This should include financial summaries, operational details, and growth potential. Again, the one-page business plan is a great option.
- Pre-qualify buyers: Before initiating discussions, ensure potential buyers are actually able to make the purchase. This will save you time and protect any sensitive information.
- Stay engaged: Even if you use a broker, stay involved. Your insights and passion for the business are often a selling point.
- Consider seller financing: Offering to finance a portion of the sale can widen your pool of potential buyers. You just need to ensure you’re comfortable with the terms and risks.
Ideally, you’ll end up with multiple interested buyers. This will give you greater leverage and more options if a deal falls through.
How to position your business to be acquired
Learn how to make your business more attractive to potential buyers.
6. Finalize a sales agreement
Speaking of deals, once you have reached a potential agreement, it’s time to get all the documents and legal details in order.
You should work with a lawyer at this stage to safeguard your interests and ensure a smooth transition to the new owner. Here’s an overview of the essentials they’ll help you assemble:
- Letter of intent (LOI): A preliminary document outlining the basic terms and conditions of the sale. It’s not legally binding but sets the stage for the formal agreement.
- Purchase agreement: The primary legal document detailing the terms and conditions of the sale. It includes the price, assets being sold, liabilities being assumed, and any contingencies.
- Bill of sale: This confirms the transfer of ownership and itemizes the assets included in the sale.
- Non-compete agreement: Buyers often want assurance that the seller won’t start a similar business within a specific time frame and geographic area.
- Employee and supplier agreements: New contracts or agreements may need to be drafted if the buyer retains current employees or suppliers.
- Due diligence: The buyer will conduct a thorough investigation of your business’s financial records, contracts, assets, and other critical documents to validate the purchase.
- Liabilities: Clearly define which liabilities the buyer will assume and which remain with the seller.
- Warranties and representations: These are statements made by the seller about the current state and history of the business. Any breach can lead to legal consequences.
- Indemnification provisions: These protect the buyer from future liabilities arising from the business’s past activities.
The sales process
- Escrow: To ensure both parties fulfill their obligations, funds are often placed in escrow until all conditions are met.
- Financing: The seller may need to provide documentation or cooperate with the buyer’s lender.
- Transition period: The seller may remain involved for a specified period and help with training, introductions to key clients, or operational guidance.
- Closing: This is the final step where all documents are signed, funds are transferred, and ownership is officially changed.
- Post-sale notifications: All stakeholders, including employees, clients, suppliers, and relevant government entities, are notified of the change in ownership.
7. Plan how you’ll manage funds from the sale
Successfully selling your business isn’t the end. You now need to plan how to manage any profits from the sale.
You may want to start another business, support charitable causes, or enjoy the fruits of your labor. Planning ahead can reduce tax liabilities and ensure the money serves your long-term goals.
While we can’t account for everything, here are some of the most common financial considerations to plan for post-sale.
- Capital gains tax: The sale will likely result in capital gains, which are taxed differently than regular income.
- Installment sales: If you receive payments over time, you might be eligible for installment sale treatment, spreading the tax liability over several years.
- State taxes: There may be state-specific sales tax depending on where your business is located.
- Debt repayment: A portion of the proceeds may need to clear any outstanding debts.
Don’t rush any decisions about how you’ll use your newfound wealth. Take the time to consider all options and speak with financial and tax advisors to discuss your goals, investment options, and the pros and cons of specific decisions.
Additional options to exit your business
Selling a business is a common exit strategy—but it’s not the only option.
There are strategic benefits to combining with another business. The key is to find a partner whose business objectives and culture align with yours. Once the merger is complete, you can explore stepping back and allowing other leadership to take over.
If you have family members, heirs, or trusted employees interested in the business—consider transferring ownership to them. This eliminates the drawn-out process of finding a buyer and can be especially meaningful for family-owned enterprises.
While not a common option for small business owners, initiating an initial public offering (IPO) can raise capital and potentially provide an exit by gradually selling your stake.
Liquidating your company assets may be the best option if your business isn’t profitable and you can’t find a buyer. While it’s often a less lucrative exit strategy, you’ll at least recoup something from your business.
Preparing to sell your business
Deciding to sell your business is a huge milestone in your entrepreneurial career. It’s not something you should do rashly. By taking the time to plan properly—you’ll increase your chances of getting your asking price.
Check out our other business management resources to learn how to grow and prepare your business long before considering a sale: