- Selling a business isn’t just about finding a buyer; it’s also about taking steps to transfer ownership of the company successfully.
- Following the right steps can improve your odds of selling your business and maximizing its value.
- Working with a broker could improve your odds of finding the right buyer at the right price.
- This article is for business owners considering selling their business independently or using a broker service.
Selling your business is a complex process with many challenges. A lot can go wrong before you close the deal, whether that’s failure to find a buyer, selling at too low a price, or running into a breach of confidentiality. But if you take the right steps to prepare for a successful sale and seamless transition, you can limit these risks.
While the sale of every business is unique, the fundamental process remains the same, and there are well-established steps you must take. This guide offers five main steps you should follow to get you through the sale of your business and to get the best price.
Steps to selling your business
If you’re ready to sell your business, take the following steps to help you land the deal you want and ensure transfer of ownership goes smoothly.
1. Maintain clean and well-documented financials.
The No. 1 reason companies don’t sell is poor or weak financials. This means you must pay your taxes and show a profit on your tax returns. Your company’s financial data is the foundation of your future sale, so getting it right is vital. Work with your accountant and tax professional on this step to form the basis of your company’s valuation and sale negotiation.
Potential buyers will scrutinize your business’s financials, as that forms the basis of their valuation. Therefore, the more information, statements and other documentation you can gather, the better.
While getting your finances in order, consider the following questions:
- Do I have intellectual property that will make my business more valuable?
- What is special about my business that makes it worth more?
- Do I have documented standard operating procedures I can give to the acquirer?
- What are the strengths and weaknesses of my business?
Presentation is important. Organize your documentation and use plain English rather than jargon. This will keep your potential buyer engaged and reduce the likelihood of misunderstandings.
2. Get an estimate of your business’s worth.
You might think you know the value of your business; you may even think it’s priceless. However, there is a true fair market value for your company and you’ll need a professional to help determine what that is. Getting an expert to examine your business’s financial stability, historic sales and expenses, and anticipated performance over time can help you maximize your valuation without overpricing your business and scaring off potential buyers.
The valuation process includes an analysis of your company’s financials, products and services, business model, marketing strategies, and management team. Everything that is relevant to the current health and future potential for your business will be considered.
Following the evaluation, you’ll receive an estimate or range of what your business is worth and the amount you should expect to sell it for. This valuation is based on a multiple of your business’s profit, as determined by similar companies that have recently sold.
Below are some of the variables that may make your business worthwhile compared to your competitors:
- Growth rate (faster growth equals a higher price)
- Competitive advantages
- Competency of the management team
- Market share
- The size of your company (larger companies generally sell for a higher comparative price)
- Industry and business model (for example, software companies generally sell for more than lawn mowing companies)
- Capital insensitivity of the business (for example, do you require more equipment than other businesses to make a profit?)
- Sales and distribution (companies with a repeatable process to get new customers tend to sell for a higher valuation)
Every business is unique, so it’s important to get a professional valuation from a reliable third party.
A good business broker or mergers and acquisitions (M&A) advisor can give you an estimate of what your business is worth.
3. Hire a reliable broker.
A broker will guide you through the complex business-selling process and do a lot of the heavy lifting for you. A good broker is worth more than the fee you pay them.
So what should a good broker do? For starters, they should take the following actions:
- Perform a business valuation and advise on a valuation range.
- Maintain confidentiality.
- Create a competitive deal process to have multiple bidders make offers on your company.
- Organize due diligence efforts to ensure a smooth sale process (many deals fall apart because of a lack of due diligence).
- Connect you with qualified, interested buyers and advertise your business.
- Facilitate buyers throughout the sales process.
- Aid with negotiations.
- Introduce resources for funding and financing.
- Coordinate lawyers, accountants and other advisors.
- Create the best deal possible for both parties.
What does a broker cost?
A broker generally charges a commission that is a percentage of the sale, but the percentage can depend on the size of the business (in terms of revenue). Variables include the location, company type, company size, and complexity of the deal. Here’s a ballpark estimate of prices you might see from brokers:
- Businesses with $1 million in revenue can expect to pay a 12 percent to 15 percent brokerage fee.
- Companies with up to $5 million in revenue can expect fees between 8 and 10 percent.
- Larger businesses with more than $25 million in revenue can expect to pay a 5 to 7 percent commission.
- Companies with revenue $50 million and over can expect fees between 4 and 6 percent.
Not all brokers are created equal, so do your research and ask previous clients about their experiences before choosing a broker to work with. The best brokers will make their process transparent and offer references that can give you more details about the level of service to expect.
4. Find a pre-qualified buyer.
As the seller, you should only entertain serious offers for your business. How do you determine what constitutes a serious offer? Buyers, however good their intentions might be, need to be able to follow through with a deal — otherwise, they’re wasting your time. Ask the important questions right away before you get your hopes up.
Here are some questions to pose to buyers from the beginning of any discussion:
- Does the potential buyer have the funding they need, or are they pre-approved for that funding?
- Does the potential buyer have experience in the industry, and do they generally know what they are getting into?
- What are the potential buyer’s intentions for the business after they take over? If you care about what happens to your business and former employees after you sell the business, this might be an important question for you.
What is the timeline the potential buyer is considering? If you want to sell soon, you might not want to deal with a buyer who wants to drag things out for over a year.
A broker will be able to help screen potential buyers for you to determine who’s serious about buying your business. A good broker will respond to your criteria for what constitutes a good potential buyer.
5. Finalize contracts and close the deal.
This is where most deals fall apart, and it’s the most complex part of the process. You need to finalize legal contracts, deal with potentially messy final negotiations, and avoid the deal falling through at the last minute.
We recommend hiring a business sales lawyer for this stage of the process. You might want to find one independently, though your broker might have several in their network. Make sure they are thoroughly in your corner, as they will look over every detail in your contract. The slightest error can potentially sink the detail.
There are plenty of documents to prepare, gather and review, including the following:
- Purchase agreements
- Bill of sale
- Reps and warranties
- Indemnification clauses
- Asset list and transfer
- Noncompete clauses and agreements
- Intellectual property transfer
- Transition time and work agreements
- Employment agreements and employee continuity
- Escrow of the sale monies, transfer and closing
You can easily be dealing with a collection of documents that is 100 pages or more once everything is accounted for. Having a professional on hand is essential to getting this right. Once everyone is satisfied with the paperwork, all that’s left is to execute the deal and transfer ownership of the business.
FAQs about selling a business
These questions are commonly asked by entrepreneurs who are preparing to sell their businesses.
What is the average sales time frame?
The average sales process takes between four and 10 months, depending on the size of the deal.
Can I compete in the same industry after I sell my business?
Generally, there will be a non-compete agreement with a duration between three and five years. This period of time is usually defined by your industry and/or your region.
Will my employees be laid off after I sell?
What happens to your employees after you sell your business is at the discretion of the buyer. That is why it’s important to understand the buyer’s intentions before you close the deal. You can, however, contractually require the buyer to maintain employment after the sale.
Will I need audited financials to sell my business?
In most transactions, buyers perform a quality of earnings analysis rather than a full audit. A quality of earning analysis provides the buyer with information like a company’s EBITDA, or earnings before interest, taxes, depreciation, and amortization.
What happens to my liabilities?
Most business liabilities need to be cleared before the business sells. If a buyer acquires a business with any outstanding debt on the books, it can become the buyer’s liability; however, this item is always pre-negotiated before the purchase agreement is signed.
Selling a business is a complex process
While some business owners think selling their business may be a simple task, it is actually a long-term process that requires extensive preparation, documentation, and deliberate action on the part of both buyer and seller. However, if you follow the steps above, you will set your business up for a relatively seamless sale that gets you the money your company is worth and sets the buyer up for success.