How to Sell Your Business
You've decided to sell your business. Every owner has their own reasons for selling. Selling a business takes significant planning. Where do you start?
So, you’ve decided to sell your business. Maybe you are ready to retire or to move on to your next business venture, or perhaps you simply need a break from the hectic life of a small business owner. Every owner has their own reasons for selling their business, but once the decision is made, where do you begin?
A business is a complex entity. Selling a business takes more planning than the sale of your average asset, like a vehicle or real estate. To successfully sell a business, you will need to:
Build Your Business Transition Team
Begin preparing to sell your business as soon as you can. From deciding you want to sell your business to the final transfer of ownership typically takes at least a few months and sometimes more than a year. To help you with this process, create a business transition team. These experts can make the sales process smoother.
- Lawyer: Selling a business can be complex. It is best to consult with an attorney on the legal details of your sale to ensure you are protected and compliant before, during, and after the sale.
- Accountant or bookkeeper: An accountant or bookkeeper can help you organize and prepare the financial documents necessary to attract a good buyer and make the sale. They can also help you plan what to do with any profits and determine the tax implications of a sale.
- Business appraiser: A business appraiser is a professional who will provide a detailed report on the value of your business, so you can set and support an appropriate asking price.
- Broker: A business broker can make the sales process smoother and reduce the risks and time commitment of selling your business, but it is not always necessary. Brokers can even help find potential buyers. However, they typically charge a hefty fee. For sales between family and friends, a broker is typically not worth the cost.
Any time you hire professionals to help or advise you on your small business, make sure you do your research. Ask for recommendations from friends or your local chamber of commerce, interview candidates, and ask for references.
Know the Value of Your Business
When determining the asking price for your business, it is important to first know the value of your business. Hiring an appraiser to complete a detailed valuation of your business can bring credibility to your asking price and prevents you from accepting less than the value of your business or expecting more than the value of your business.
There are different valuation methods, so be sure to speak to an appraiser about the methods they use and how that might impact their valuation of your business.
Prepare Documents and Organize Your Finances
Paperwork will be involved any time you sell an asset, and selling a business is no exception. To support your asking price and convince a potential buyer of the benefits of buying your business, you will need to provide financial documentation for the past 2-4 years. Financial documentation typically includes:
- Balance sheet
- Cash flow statements
- Income statements (also called a profit and loss statement)
- Business tax statements
This documentation allows a potential buyer to assess the profitability of your business along with its assets, liabilities, monthly revenue, and legal standing with the IRS.
Include a Business Summary
A business summary documents the history of your business, where it is today, and how it got there. You can think of it as a detailed, written sales pitch for your business. It typically includes the date the business was established, an organization chart of current employees and their roles, any relevant dates or milestones, a summary of your products or services, recommendations to the new buyer, and your primary competitors, among other information. The business summary can help potential buyers appreciate the non-monetary value of your business, like employees and community involvement, and helps them to understand how your business runs.
If you choose to include detailed business practices in your business summary, consider having potential buyers sign a confidentiality agreement or NDA before they review the document.
Understand the Tax Implications
Taxes are one of the few certainties of life and they apply to the sale of your business, just like the apply to the sale of any asset. Your tax professional can help you understand the detailed tax implications of your specific situation. Before you complete the sale, you should understand how federal, state, and local taxes will apply to the transaction and how that will impact you as the seller. Tax implications vary based on the nature of the sale and the type of legal entity of your business.
Find a Buyer
One of the biggest challenges you will face when selling your business is finding the right buyer. If you choose to use a business broker, they can help you find buyers. If you choose to complete the process without a broker, posting the business for sale on local business forums, like a chamber of commerce, is a great way to find local buyers. Industry organizations, newsletters, and websites are also good places to market your business. Consider asking trusted senior employees or family and friends of they are interested in buying the business. Familiarity with the business can increase the probability of business success after you transfer ownership.
Once you have a prospective buyer, it is important to keep the process moving to keep them interested. Before you advertise your business for sale, prepare your documentation, consult with your transition team, and be prepared to negotiate with potential buyers. Consider asking potential buyers to sign confidentiality agreements before you give them access to your business’ financial details. Your attorney can help you draft these agreements.
Plan How You Will Use the Profits
Once you have a sale on the horizon, you need to plan how will you use any profits from the sale. After you have paid off any debts or liabilities related to the business, what will do you do with the profits? Do you want to save them for a rainy day? Or maybe you want to invest them in your next business venture? There are many options, but proper budgeting and financial planning can help you make the most of the funds.
This step is best handled with the assistance of an attorney to ensure compliance with all local, state, and federal regulations. At a minimum, it will involve a bill of sale and can require other documentation depending on the details of the sale. The bill of sale will define the terms of the transfer and exactly what is included in the transfer.
In addition to negotiating the cost and timing of the sale with a buyer, you will also negotiate the terms of the sale. That includes the specific details of the transfer of ownership that will be outlined in the sale documents. Will it be an outright sale, where you receive payment in full? Or is it going to be a gradual sale, with payments over time? You could also explore a lease option, which is a temporary transfer of business ownership. Each type of sale requires different documentation. Consult with your attorney to make sure the details of the sale are clearly laid out in the bill of sale.
Not only will this be a big change for you, this will also be a big change for others who rely on your business, including employees, customers, contractors, and vendors. There are no guarantees that the new owners will keep things exactly the same as they were. As owners, they can choose to do what they think is best for the business, including staff changes, working with different vendors, and changing products or services and their costs. Every situation is different, but communicating the change in ownership to each stakeholder and what the means for them is a vital part of ending your involvement in your business. Experts recommend communicating the change in ownership on a need-to-know to know basis only until you are very far along in the process. You don’t want to cause unnecessary panic, but you also want to give all stakeholders enough time to adjust and react to the change.
Identify Your Next Steps
Congratulations, you sold your business! After you celebrate, take a step back from the busy life of a business owner and evaluate what you want to do next. Maybe you are ready to set some goals for your next professional endeavor or perhaps you need to re-evaluate your priorities and find a better work-life balance. No matter what you want to do next, take some time to reflect on what went well, what didn’t, and everything you learned along the way.
Our experienced business coaches can help you prepare to sell your business and with any other small business questions you might have. Sign up for a free coaching session here.