If you’re like many business owners, you've poured your heart and soul into turning your dream into a viable business. Making the decision to sell can be an emotional one. It’s important to take calculated steps that will ensure your selling experience is positive and that your business sale is successful.
Selling a business can be daunting and time-consuming for small business owners. Even with an advisory team on board, the selling process can be quite intimidating. To avoid the most common pitfalls, it’s important to start planning early and get all the moving parts in order.
It’s not uncommon for small business owners to make costly mistakes when selling their business and inadvertently lose thousands of dollars in the process. In this article, I'm breaking down the process of how to successfully sell your business. Keep reading for tips on how to ensure you get top dollar in exchange for all the time and money you've invested into your small business.
Determine Your Objectives
When selling a small business, it’s crucial to clearly define your goals and objectives. The overall selling process comes with a great deal of decision-making, and at times, those decisions might pull on your heartstrings. For instance, what if the deal’s most qualified buyer is your direct competitor? After years of competition, it might be quite challenging to remove your personal opinions and judgments to see the deal objectively.
During the process of selling your business, it’s important to keep your emotions out of the transaction. Focusing solely on your objectives will help you keep your best interests at the forefront of your mind and not be swayed by the emotions that accompany letting go of the business you worked so hard to build. Also, when you keep your long-term goals in mind you're less likely to make short-term decisions that don’t reflect your objectives.
There are many creative ways to go about selling your business. Consider your financial needs when deciding on the option that best aligns with your long-term plan.
If you’re not sure of your objectives, ask yourself these questions to gain some clarity.
● Do you want to sell the business in its entirety and walk away with the cash?
● Do you want to pass the business on to family members or employees?
● Would you like to work a few more years after selling all or part of the business?
● Is it important for the brand to remain intact?
● What are your financial needs?
● What are your plans for after the sale?
Answering these questions will help you determine how much cash you need from the sale and whether creative arrangements, like an installment sale, might be a good fit for you.
Understand The Process
Just like the business itself, every business sale is unique. If you’re not sure where to begin, I've created a simple outline of how the business sales process generally looks.
#1 - Conduct a business valuation exercise
#2 - Give prospective buyers an offering memorandum
#3 - The potential buyer conducts their own due diligence
#4 - Negotiate the key terms
#5 - Prepare, review and sign all contracts
Of course, depending on the specific details, this process can be much more complicated. For most small to mid-sized companies, though, this is typically how things unfold.
By educating yourself prior to business sale, and understanding the ins and outs of your financial records, you’re more likely to reach the business sales agreement you’ve envisioned and reach your personal goals.
Create Your Team
When selling a small business, it’s crucial to have a team of trusted advisors to help guide you in the process. Here's a list of the professionals you need on your team.
# 1 - Legal Professionals
If your business doesn't already have an attorney on retainer, it’s a good idea to hire one as you get closer to closing the deal. You’ll need the help of an attorney to draft and review your business sale contract. By investing in hiring a legal professional, you’re able to avoid any unforeseen issues.
When hiring legal counsel, be sure they’re competent in contract law. An attorney that specializes in this area will ensure your business sales contract is void of any holes or inconsistencies.
A business attorney can also draft a firm non-disclosure agreement, or NDA, that will protect your company’s interests while also providing reassurance to qualified buyers.
#2 - Business Broker
Business brokers are skilled at guiding you through the process of selling your company. They specialize in getting their clients excellent deals when selling a small business. Business brokers can help you obtain a proper valuation for your company, create an attractive prospectus for potential buyers, and find potential buyers who are interested and qualified.
While the expertise of a business broker is invaluable, it does come at a cost. Business brokers typically charge anywhere from 5% to 10% of the total sale price for your small business.
#3 - Financial Professionals
The team of financial professionals assisting with the sale of your business may vary depending on your specific needs. An accountant or CPA should be involved in the entire process of the sale. Among other things, they can advise you on the tax implications of selling your small business.
Prior to initiating the sales process, ensure your bookkeeping is spotless. Not only will this save you from added stress, but it’s also vital for getting the best deal for your company. Consider hiring an experienced bookkeeper to get your financials in order.
Valuation experts can precisely figure out the actual value of your small business based on sales, revenue, outstanding invoices, and debts. By bringing in a third-party evaluator, you’re able to mitigate risk should the potential buyer argue the amount that your business is worth. By hiring a valuation expert, you’re able to determine a fair price based on the business’ actual worth and market conditions.
For a successful sale, it's important to work with a team of experts that can help you navigate your options. You’ll likely need advice on how to structure the business sale, how to retain key employees, tax planning, and cash flow planning after the deal closes, among other things.
Know The Numbers On Your Financial Statements
Deciding to sell your small business means you’re opening up your financial records for review. Everyone who becomes involved in the sale will likely see the financial details of your business, including, but not limited to, lawyers, accountants, business valuation specialists, and your potential buyers.
Your first step should be to get your business financials in order. This is the time to do any necessary clean-up, prepare financial statements, and get together projections and key metrics. It's a good idea to start early so you have time to make any needed adjustments.
As the seller, you’ll need to provide, on average, three years’ worth of tax returns and financial statements for your small business. Be prepared to account for all business income over the last few years, keeping in mind that any missing money could be considered a red flag by prospective buyers.
The sale of your small business requires a formal evaluation of exactly how much your company is worth. Potential buyers need reassurance that your company is worth the asking price.
Having a proper valuation of your small business and its assets protects both you and the buyer. Oftentimes, things like cash flow, intellectual property, financial statements, customer base, and management team all play into the transaction.
Being transparent and demonstrating the true value of your company, will give a better chance of maximizing the price of the sale and ensure you’re getting the best possible result.
Plan Your Exit
Once you make the decision to sell, it’s time to determine how you’ll decrease your involvement in the day-to-day operations. As you develop your exit strategy, it’s wise to assess how your decision to sell your business will affect your personal finances.
Consider the following questions as you plan your exit.
● Who will take over the day-to-day operations, if the buyer retains the existing staff?
● What pain points are present and how will they be addressed?
● How much do you need to make from the sale in order to stabilize your personal finances?
● How will you maximize the proceeds of the sale?
Now is the time to consider your personal goals going forward. As the closing of the sale nears, it’s time to decide if you’ll fully retire, start a new business, or do something completely different. Selling your business gives you a unique opportunity to diversify your investments and create an income stream for retirement. This is a contrast to being a business owner and having your net worth highly concentrated in one asset.