Selling a Business

Most entrepreneurs dream of taking a small business from startup to an eventual sale. However, small business owners need to prepare to sell their business. This includes gathering the proper documentation to set your asking price, an exit strategy, finding potential buyers, and finalizing the sale process.

This article covers the basics of selling a business, including the timing, the importance of succession planning, business valuation methods, and other related topics small business owners need to know.

Reasons To Sell a Small Business

Reasons for selling a business vary from person to person and industry to industry.

Family members who were to take over the family business may decide they want to be something other than small business owners. Cash flow may hinder the current owner's profits, who needs to sell. Bankruptcy could force the sale. The real estate market may have changed, and rent or mortgage is too high for the small business owner to afford.

Ideally, a small business wants to sell when the economy is doing well and profits are high. When these conditions exist, the companies sell for a higher sale price.

Preparation To Sell a Small Business

Before setting an asking price or organizing a strategy to sell your small business, you need a business valuation. The value of your business depends on your preparation.

Gather Proper Financial Documents

Make sure you gather these documents so your CPA or a business appraiser can value your business correctly:

• Tax returns
• Financial statements and other financial records
• Balance sheets
• List of liabilities, including any Small Business Administration (SBA) loans
• List of assets, including real estate
• Metrics of the business, including profit and loss, inventory, and trends

Gather Business Documents

You also need to gather other business documents that may shed light on your business valuation like:

• Operating agreement or bylaws
• Confidentiality agreements
• Intellectual property certificates or registrations for trademarks, service marks, patents, or copyrights
• Partnership agreements
• Buy-sell agreements
• Stock certificates

Hire a Business Appraiser

Hiring an appraiser can help you determine the correct price for your company. It also allows you to learn about the market price for businesses like yours. There are commonly agreed-upon prices within the industry and region. A professional appraisal gives buyers a higher degree of confidence that they are receiving a fair deal and increases the appearance of professionalism.

Business Valuation Methods for When You're Ready to Sell

Determining the value of a business is hard. Setting a selling price too high can drive away potential buyers, especially if the valuation is inaccurate.

There are three basic methods of business valuation worth considering before you put your company on the market and set your asking price. These three approaches are:

• The Market-Based Approach: This valuation method looks at other businesses in the same or similar industry that have been sold. It bases your price on the average price of similar companies sold. This type of valuation is not always accurate since it looks to the market rather than your business's specifics.
• The Asset-Based Approach: This valuation method calculates the value of the business assets. It bases the price of the business on its fair market value. The downside of this method of valuation is that it needs to quantify other valuable intangible assets like a business's goodwill or potential for future revenue.
• The Income-Based Approach: This valuation method looks at the amount of money the business generates for the owner. It takes into account both income and debts owed.

Finding Potential Buyers

Leave yourself enough time to find a buyer and new owner for the business. Some methods include:

• Search locally: Look at who is buying similar businesses locally. Approaching larger regional businesses that deal in the same industry is helpful, too.
• Hire a business broker: A mergers and acquisitions professional can assist you in locating a buyer.

Protecting the Sale Process

Before entering negotiations or signing legal documents to close the sale of your business to a new owner, ensure all parties sign a confidentiality agreement. This includes the appraisers, brokers, and prospective buyers. You will be sharing sensitive business information that you do not want to leak to the public or competitors.

Financing the Sale

Before selling, consider how the seller will finance their purchase of the business. Banks or other institutions often fund businesses, but in this situation, you will need a qualified buyer that the lender is willing to lend the capital.

Another alternative is to provide seller financing. This is extraordinarily common, and if you are unwilling to finance at least a portion of the sale, you may be unable to sell the business.

Expect Negotiations

Expect a potential business buyer to negotiate on your asking price. If the market has changed since your broker approached them, they may offer less. If you had a patent approved, you may ask for more. Everyone wants a good deal for themselves, and negotiations are where the parties compromise for it.

Your Due Diligence

A buyer can access your business documents and financial records in a sale. You are legally obligated to act in good faith and with due diligence in producing the documents. If you lie about your finances in the negotiation process or fail to mention a lawsuit judgment you have to pay, the sale agreement can be terminated. You will have to pay penalties and will be throwing money away.

Sales Agreement and Closing

Once all parties have done their due diligence and are ready to sell, the sale of a business occurs. All parties sign a sales agreement that includes a list of assets, a non-disclosure agreement, a selling price, and timelines for payment if the new owner financed the sale from the previous owner. Ideally, the deal would be best to have uninterested witnesses and a notary public witness.

Exit Strategy

After a successful sale, you need to wind down your involvement in the business. This includes:

• Splitting profits with other members of the business, if necessary
• Informing the employees of the change of ownership
• Informing your loyal customer base and vendors of the sale
• Consider retirement planning

Selling a Small Business Articles

• Broker Listing Agreement
• Completing an Asset Sale
• Business Valuation Methods for When You're Ready to Sell
• Completing an Asset Sale
• Due Diligence Checklist - Being Acquired
• How and When to Sell a Business
• Sample Representations and Warranties
• Succession Planning for Small Businesses
• What Is Divestiture?
• What Is a Letter of Intent?
• What Is a Leveraged Buyout?

Hire a Business Lawyer for a Successful Sale

When selling a small business, it's easy to want to save costs and do it yourself. Hiring a business broker and a business lawyer amplifies your ability to sell your business to a prospective buyer. Find a commercial lawyer to help you get the asking price you want while protecting your intellectual property.