How to Sell a Business in 8 Simple Steps

Sell Your Business in 8 Simple Steps

“I want to sell my business but I don’t even know where to start!”

Many business owners avoid the idea of selling a business because they don’t know where to start.  The whole process seems long and tedious, so they avoid starting the process altogether.  Luckily, Exit Brokers (a Colorado business brokerage firm) has outlined how to sell a business into 8 simple steps.

Sellers who improvise are less likely to achieve their business exit goals.  In fact, they are less likely to sell their business at all.  It is shocking how little most business owners think about their exit.  This lack of planning is one of the main contributors to only 1 in 5 businesses selling on the open market.

how to sell a business

Sellers maximize their business sale value by being prepared.  Prepared sellers have a very clear understanding of the strengths and weaknesses of their business.  They know their business sale goals and have realistic expectations on the value of their business.  They understand the selling process and they follow the process.

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Step 1 - Determine Your Goals for Selling the Business

Planning to selling your business (also known as exit planning) helps owners outline their goals.  A business owner should think to identify the key priorities.  Those areas are: why am I selling, what is my most important sale result, and when do I want to exit.

Why Are You Selling the Business?

There are many reasons to sell a business.  The most common reason is retirement.  After working in a business for many years, an owner may want to sell to spend more time with family.  Another reason is change.  Often after 8-10 years of running a business, an owner needs to change things up.  Perhaps they have a new idea or are burnt out.  Sometimes an owner has health concerns and needs to step back to recover.  There are many other reasons, but understanding motivations for selling is crucial in determining your business sale goals.

What is the Most Important Business Sale Result?

A seller’s motivation plays a large role in the type of deal they find acceptable.  It is surprising how few owners main concern is the business sales price.  Many owners saved enough money and are only looking for a reasonable price.  More frequently, seeing their legacy carry on is more important than the price tag.  Identifying your most important outcome from the sale helps as an owner starts interviewing buyers.

When Do I Want to Exit?

When to sell your business can be a tricky question.  In an ideal world, a business owner starts their exit planning 3.5 to 4 years ahead of the exit.  The ideal timeline allows time for preparing the exit plan, implementing tax and value enhancement planning, selling process, and transition process. Far too often, an owner wants to exit on a shorter timeline and value is lost.

when do you want to sell your business

Step 2 - Find a Business Broker or Investment Banker
to Help Sell the Company

One of the most important decisions when selling a business is who choose to help sell the business. 

Depending on the size of your business, you work with a business broker or an investment banker.  Business brokers typically work with businesses with less than $5 million in revenue.  Business brokers are much better at selling a small business.

Investment bankers (also known as M&A advisors) typically work with mid-sized to large businesses.  Mid-sized businesses typically have between $5 and $50 million in revenue.  Most investment bankers have minimum revenue or EBITDA figures for the businesses they work with.

Whether a business broker or investment banker is best, we recommend taking time to choose the best fit.  Personality can often be an important factor because an owner interacts with this person or firm regularly.  These advisors often require a minimum time commitment and a retainer so make sure your choice is a good fit.

Step 3 – Determine the How Much Your Business is Worth

There is no one-size-fits-all formula for finding out how much your business is worth.  However, there are a number of ways to determine a realistic range of value.  If you want to do this yourself, there are a number of business valuation calculators online.  The first step is determining your SDE or seller’s discretionary earnings.  Another term for SDE is adjusted cash flow or adjusted EBITDA.  Valuation is typically some multiple of SDE or EBITDA.

how much is your bsusiness worth

Hopefully I didn’t lose you there?  As you can see, the business valuation process can be confusing without a guide.   We strongly recommend paying for a business valuation or appraisal.  This allows you to get an unbiased opinion of the market value of your business.  This number may be lower than you hoped for or expected.  In our opinion, an owner’s expectations is the biggest factor in whether a business sells or not.

A proactive owner gets to decide if it’s worth working to increase the business value.  A business value can be increased if an owner knows what drives business value. 

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Step 4 - Prepare the Business for Sale

So, you identified your goals, found a business broker and determined value.  Next step is to prepare your business for sale.  This involves preparing business financials, performing pre-sale due diligence, and preparing marketing materials.

Prepare Business Documents

One of the biggest mistakes we see is an owner taking a business to market with messy financials.  Business buyer quickly determine their interest in a business.  One of the quickest turn-offs is not having the ‘house in order’.  An owner needs to have profit and loss statements for the last three to five calendar years.  It is also important to have a trailing twelve-month (TTM) profit and loss.  An owner also needs to breakdown the equipment and inventory with approximate market values of each.

Depending on the size of the business, of few other items should also be prepared.  Run a report breakdown of customers (remove names) by revenue percentage.  Prepare a list of vendors and suppliers as well as a list of large contracts.  Prepare a list of employees paying special attention to ‘key employees’.  Key employees are the employees who are crucial to the success of the business.  A prepared owner has a plan for retaining key employees.

Pre-Sale Due Diligence

The easiest way to waste 3 to 6 months of your time is to not go through pre-sale due diligence.  If you skip this step, you’ll likely see several offers fall through because a buyer “discovers” something.  By performing pre-sale due diligence, an owner identifies potential issues so they can be disclosed to buyers.  A disclosed issue prevents a buyer from thinking an owner has something to hide.

Pre-sale due diligence needs to look at the business from an objective view point.  Pre-sale due diligence is best performed by a third-party.  A business broker or investment banker worth their salt will perform this as part of their process.  The process needs to look at financial, strategic, operational, and legal aspects of the business.  If an issue is found, a plan should be created for addressing the issue.

Prepare Marketing Materials

After you have prepared the business, the next step is to take the business to market.  There are several strategies for marketing a business.  Sometimes a business is well-suited for sale to an individual.  Other times a business is well-suited for a strategic purchase by another business.  Each strategy has its own process.  Your business broker or M&A advisor will be able to identify the best strategies.

how to sell your business - prepare marketing material

Step 5 - Market the Business to Qualified Buyers

After you have prepared the business, the next step is to take the business to market.  There are several strategies for marketing a business.  Sometimes a business is well-suited for sale to an individual.  Other times a business is well-suited for a strategic purchase by another business.  Each strategy has its own process.  Your business broker or M&A advisor will be able to identify the best strategies.

Follow a Process

Having and following a process is key to a successful sale.  The process needs to ensure select information is shared to protect the business.  It is not good for the general public to know that a business is for sale.  Public knowledge causes unnecessary panic from employees, customers, vendors, and suppliers.  A business broker needs to be able to outline their process.  This process needs to outline how information will be shared with potential buyers.

Qualify Buyers

There is nothing worse than a tire kicker.  We’ve all dealt with a tire kicker in our lives and know how frustrating they can be.  Only qualified buyers should be granted access to the business information.  A buyer should be qualified in three areas: liquid capital, credit, and experience.  A buyer needs to have a minimum of 20% of the asking price to obtain an SBA loan.  The SBA typically requires a credit score of 650 or better for a business loan.  Lastly, success of the business depends on the buyer’s experience running a business.

Step 6 - Field and Accept an Offer for Your Business

If you’ve done a good job so far, it is likely you will start receiving offers for your business.  Allow your pre-sale planning to guide your decision.  Spend time here negotiating items you outlined in your goal planning.  It is our experience the more specific the terms of an offer, the more likely it is to close.

Start by getting agreement on the price and payment structure.  Next, move on to other issues you’ve deemed important.  Do you want to have certain non-compete provisions?  Do you want to outline specific of the transition?  This is the best time to get high-level agreement on these things.  An offer needs a timeline for due diligence, outlines any excluded assets and sets expectations for both parties.  Deals often fall apart because parties expectations aren’t managed.

Step 7 – Survive the Due Diligence Process

Due diligence is often where deals fall through.  This is often because a buyer finds information that wasn’t disclosed which changes their perception of the business.  By front-loading the due diligence work, it is less likely the buyer will be surprised by anything.  We have found it far better to disclose something because buyers always find it.  If a seller hid something it creates distrust.  Disclosure builds trust.

During the due diligence process, it is important to stick to the agreed upon timeline.  A process for sharing information should be provided by the business broker.  Technology allows private sharing rooms to be created where information can be safely shared.

Due diligence is also where definitive documents are prepared.  Definitive documents are the official business sale documents.  This include the purchase agreement, bill of sale, non-compete agreement, asset allocation, representations and warranties.  Most business sales include a similar set of documents and these should be drafted or reviewed by an attorney.

accept an offer to sell your business

Step 8 - Closing the Sale and Transitioning the New Owner

Once you’ve survived due diligence, the next step is closing the sale.  At closing, parties sign any remaining documents and an owner is paid.  Usually by this point, everyone is a bit tired and ready to be done with the deal.  Often this is when non-key employees are made aware of the sale and introduced to the new owner.

 The last step is transitioning the business to the new owner.  Most deals require the seller to stick around for some period of time.  This can be as simple as a 30-day training period or a more complicated year-long consulting agreement.  Agreement on this transition period occurs either in the initial offer or during due diligence.  Many owners overlook this aspect of exiting the business and end up waiting longer than expected to retire.

Follow These 8 Steps For a Successful Business Sale

As mentioned before, the whole exit plan process should take 3-4 years if done correctly.  This allows an owner to identify priorities and prepare the business for sale.  Business owners should never try to go it alone in selling a company.  A team of advisors should help the owner throughout the process.