Selling your business can feel like parting with a child. You’ve poured your heart and soul into this venture, weathered storms, navigated adolescence, developed relationships, and celebrated numerous victories. But now, you’re considering a new chapter.
Some business owners feel that challenges and headaches signify it’s time to sell. However, if a business is so intertwined with you that it can’t function in your absence, it may lack market value. And let’s not underestimate the emotional attachment; sometimes, it’s stronger than we realize, causing internal struggles that could even sabotage a potential sale.
No matter the circumstances, deciding to sell is not an easy decision, and it often comes with a whirlwind of unexpected emotions. So, as we dive into the complexities of selling a business, remember that it’s not just about what you’re leaving behind. What’s even more important is what you’re moving towards.
The Most Important Things to Consider Before Selling Your Business
Before you decide to sell your business, there are several important factors to consider.
First, it is essential to ensure that your business is operationally sound, with consistent revenue and margins, and well-established systems and staff that can function without your day-to-day involvement. A business laden with challenges and inconsistencies that relies heavily on its owner often has little value to a potential buyer.
Next, do not underestimate the emotional attachment you have with your business. There might be days you feel like saying, “good riddance,” but you are possibly more emotionally connected to your business than you realize. If running a business is all you’ve known for much of your adult life, many owners actually find themselves facing an identity crisis when it sinks in that the “thing” that has occupied so much of their time, effort and energy will suddenly be gone. Frankly, they’re not sure what they are going to do with themselves, or fear sets in that they’ll lack personal fulfillment or financial security. I’ve seen many business owners unintentionally sabotage potential sales due to this internal conflict.
Remember that selling your business isn’t just about what you’re letting go of, but also about what you’re transitioning towards. Whether it’s a new business venture, retirement, checking things off that bucket list, or a shift in life priorities, it’s vital to have a well-laid plan for your post-sale life. This process is not just an end, but the beginning of a new chapter. Make sure you’re ready to sell and enter that new chapter.
11 Steps To Sell Your Business Successfully
1. Reasons for the Sale
The first step in preparing for the sale of your business is to be clear about your reasons for wanting to sell. It may seem straightforward, but it’s more complex than you might think. Are you selling because you’re ready for retirement, or is it because you’re burnt out? Is it because you’ve been offered a lucrative deal, or do you want to explore new ventures?
Ask yourself, “Am I selling because I want to move away from something (e.g., business frustrations), or because I am moving toward something (e.g., what’s next)?”
Understanding your reasons for selling is crucial because it directly impacts how you prepare your business for sale, how you approach potential buyers, and the kind of deal you’ll be open to. For example, if you’re selling for retirement, you might be more likely to accept a slower payout over time, while if you’re looking to start the next business quickly, you might favor a quicker, lump-sum deal.
It’s also essential to understand that your reasons for selling will be scrutinized by potential business buyers. They want to make sure that they’re investing in a business that is sound and has growth potential. So, if your reason for selling is burnout, for instance, it might raise flags about the business’s viability once you exit.
2. Define Your Exit Strategy and Consider All Potential Exit Options
If you want to sell your business successfully, you need to define a clear and successful exit strategy. This strategy should outline your financial goals, target the right potential buyers, the potential sale price, and the timeline for the sale. Planning your exit strategy well in advance — ideally, at least a few years before you plan to sell — can help make sure your business is sold at its maximum price and that you leave on your terms.
As you define your exit strategy, consider all potential exit options. These might include selling to a third-party, a private equity firm, to your employees (through an Employee Stock Ownership Plan, or ESOP), or passing the business onto a family member. Each option has its pros and cons and will have a different impact your financial future.
Selling to a third-party, for instance, might bring you the highest price, but it could also mean relinquishing control more quickly and risking the business reputation you’ve worked so hard to establish. Transferring ownership to a family member or employee can offer more control over the transition process but might not maximize your financial return.
3. Determine the Market Value of Your Business
Determining the fair market value of your business is a tricky but crucial step in the selling process. It’s not just about figures and facts but also perceived value and the economic climate. The market value is not what you think your business is worth, but rather what a potential new owner is willing to pay for it.
To get started, you could hire a professional business broker or valuation expert who will provide an unbiased evaluation of your business’s worth. They’ll consider multiple factors such as assets, income, market environment, and cash flow. Additionally, they’ll assess the intangible elements like brand reputation, customer relationships, and industry trends.
There are numerous valuation methods, such as the income approach, market approach, or asset-based approach. The income approach bases the business’s worth on its ability to generate revenue, the market approach compares it to similar businesses sold recently, and the asset-based approach values it based on its net asset value.
A great broker will also consider your “Rembrandts in the attic” – a term M&A expert John Ratliff coined, referring to the hidden features or capabilities in your business that might seem common to you (so common that you don’t recognize the value), but have tremendous value to the right buyer.
Remember to be realistic and objective at this stage, but not to overlook hidden details and pockets of value. An overpriced business can deter buyers, and an underpriced one could mean leaving money on the table. It’s a fine line to tread, which it’s why it’s worth involving an expert who can help you take an objective approach to setting a fair and competitive asking price that is attractive to both you and the potential new owners.
4. Consider Who the Potential Buyers Are
Reaching a qualified buying pool is a critical step when selling your small business. Understanding who might be interested in your business can shape your sales approach and even influence how you position your company in the market. Generally, prospective buyers fall into one of three categories: strategic buyers, financial buyers, and internal buyers.
Strategic buyers are usually businesses in your industry or adjacent to your industry, looking for ways to grow quickly, enter new markets, or acquire unique capabilities. They are often willing to pay a premium if your business offers a strategic advantage, such as unique technology, a loyal customer base, a specialized workforce, a strong brand, or the ability to expedite their growth significantly faster than they could achieve organically.
Financial buyers, including private equity firms and certain individual investors, are mainly interested in the profitability of your business and its growth potential. They look at your business as an investment, so they’ll focus on its financial health and potential to provide a return on their investment.
Internal buyers can be members of your management team or family members. These buyers already have a deep understanding of your business and its value. However, financing the deal can be a challenge for them.
While considering how to find a buyer, think about what your business offers and who might value it most. Keep in mind that different types of buyers will bring different advantages and challenges to the sale process. Thus, understanding who your potential buyers are can greatly influence the way you get your business ready for sale, find the right fit, and, eventually, the success of the deal.
5. Prepare for the Due Diligence Process
When you are preparing to sell the business, getting ready for the due diligence process is important for both buyers and sellers. This process involves a thorough examination of all aspects of your business by the prospective buyers. It’s their opportunity to validate the information presented to them and assess the overall health and viability of your business. Expect them to delve into your financial records, legal documents, customer relations, and human resources, among other areas.
Start preparing for this process early by conducting an internal review of your business. Work with an accountant to prepare or clean up your financial records and tax returns dating back three to four years. Also, ensure that your contracts and legal documents are updated and accessible, and that there are no outstanding legal issues. Be prepared to provide details about your customer buying patterns, suppliers, and any liabilities. Having neat and organized documentation showing your business’s history, financial stability, and growth potential can significantly speed up the process and give the buyer confidence.
It’s crucial to be transparent and forthcoming during due diligence. Any discrepancies found between what you’ve represented and the actual state of your business can reduce trust, lower your business’s perceived value, or even halt the sale.
6. Develop the Marketing Program
Developing an effective marketing program is vital to attracting buyers, and a great business broker can help you with these steps.
Every business is unique, so don’t hesitate to highlight your company’s selling points, its growth potential, and the opportunities it presents for the buyer. Start by creating a comprehensive Information Memorandum (IM). This document should provide a detailed overview of your business, including its history, operations, financial performance, and future growth strategies. It’s your chance to present your business in the best possible light, so be sure to highlight key achievements, unique capabilities, and competitive advantages.
Next, consider how best to reach your target audience of potential buyers. This could involve business sale websites, direct outreach to businesses or investors who meet your ideal buyer profile, or leveraging personal relationships. Engaging a business broker or a mergers and acquisitions advisor can also give you access to valuable networks and expertise.
Ensure that your marketing efforts maintain confidentiality. You don’t want to alarm your employees, customers, or suppliers before a sale is finalized. For example, avoid using your company name in advertisements and opt for a more generic description. When sharing sensitive information with potential buyers, use Non-Disclosure Agreements (NDAs) to protect your business.
7. Get Familiar with the Likely Documentation
Familiarizing yourself with the documentation likely to be involved in your sale could save you costly delays and stress down the road. This step encompasses a variety of legal and financial documents that will be scrutinized by potential buyers. These documents often include financial statements, asset inventories, business plans, and employee agreements, among others. All these documents must be updated, accurate, and readily available to present to potential buyers.
Furthermore, understanding the purpose and details of documents such as the Letter of Intent (LOI), which outlines the preliminary terms of purchase, and the Purchase Agreement, which specifies the final terms and conditions of sale, can save you time and avoid unnecessary confusion or surprises during the sale.
Consider engaging a legal advisor to help you navigate this complex process. Their expertise can be invaluable in ensuring all documents are accurate and protect your interests. Avoid relying on generic templates downloaded from the Internet, as those might not be specific enough for your industry, state, or specific conditions.
8. Timing of the Sale
The timing of your sale is a crucial aspect to consider. Ideally, you want to consider selling when your business is performing well and showing consistent revenue growth because these are key factors potential buyers will look at. Trying to sell during a downturn may reduce the value of your business and make it harder to find an interested buyer. While it’s not always possible to predict market conditions, being aware of the general economic environment can help you choose the best time to sell. It also pays to consider the seasonality of your business – for example, if your business flourishes during a certain time of the year, it may be beneficial to start marketing your business for sale a few months prior.
The sale of a business takes time, often six months to two years, so factor this into your plans. Be patient and avoid rushing the process; the right buyer at the right price is worth the wait. And don’t forget, your readiness to exit the business is just as significant as any external factor. Don’t rush into a sale if you’re not mentally prepared to let go – it’s a big decision and one that requires thorough consideration.
9. Use a Broker When Selling Your Business
As mentioned previously, engaging a professional business broker when selling your business can be a game-changer. These seasoned professionals bring their extensive market knowledge, business valuation expertise, and a vast network of potential buyers to the table, making your sale process smoother and more effective.
A broker can help you present your business to potential buyers in the most attractive light, emphasizing strengths and opportunities while tactfully addressing any areas of concern, showing the buyer how and where they can continue to add value to the business. They can also assist with complex negotiations, ensuring you receive the best possible price for your venture.
It’s important to choose a broker who understands your industry and has a proven track record. Consider their fees, but don’t let cost be your sole determinant – remember, a good broker can often secure a selling price that far outweighs their fee, and ensure your legal and financial interests are well guarded in the process.
10. Negotiate the Deal
Negotiating the deal is where your patience, preparation, emotional intelligence and business acumen come into play. As a starting point, ensure you have a clear understanding of what your company is worth to confidently negotiate from a position of strength. But remember, it’s not just about the selling price. You’ll also need to consider other factors such as the deal structure, payment terms, and future commitments, amongst others.
It’s normal to encounter some push and pull during this process. Potential buyers may present lower offers for your business or different deal structures. Here, it’s necessary to find a balance between maintaining the deal’s attractiveness to the buyer and securing an optimal outcome for yourself. Don’t be too quick to reject offers. Instead, consider counter-offers that could bring both parties closer to a win-win result.
In these situations, having a skilled negotiator on your side, such as a business broker or legal advisor, can be invaluable. They can guide you through the negotiation process, helping to ensure that your interests are protected and that the final deal aligns with your exit goals.
Above all, it’s essential to maintain open and transparent communication throughout the negotiation process. This helps foster trust, which can be instrumental in securing a favorable deal.
11. Be Prepared to Stick Around for a While During the Transition
In most cases, a successful business sale doesn’t mean you hand over the keys one day and walk away forever. Frequently, buyers will request a transition period where you remain involved in the business (often in a consultative capacity) to ensure a smooth handover. This is particularly common when the business relies heavily on the relationships and knowledge that you, as the owner, have cultivated.
During this transition period, you may be asked to assist in various tasks such as training the new owner, introducing them to key clients, or helping them understand the intricacies of your operations. This phase, while perhaps bittersweet, is a crucial step in preserving the legacy of the business you’ve built.
The length of the transition period can vary, usually ranging from a few weeks to a couple of years, and it’s typically negotiated as part of the sale agreement. While this stage might feel like an extended goodbye, it’s a valuable opportunity to impart your knowledge, offering the new owner the best possible start for the continued success of the business and team.
Is Selling Your Business a Good Idea?
Selling your business is a complex process. That said, deciding whether or not to sell your business is a deeply personal decision and one that should not be taken lightly. There are numerous factors to consider, many of which are tied to your personal circumstances and the state of your business.
First and foremost, you should evaluate your readiness to sell. Are you mentally prepared to let go and move on to the next chapter of your life? Selling a business can be an emotional experience, particularly if you’ve spent years building it from scratch. It’s vital to be sure you’re ready for this transition, and that you are moving toward something in life, not just moving away from something.
Additionally, consider the financial perspective. Is your business in a position where it’s attractive to potential buyers? Businesses with a strong track record of profitability, a loyal customer base, and growth potential tend to get the best price. You should also consider market conditions. Selling in a strong economy may yield a higher return than during a downturn.
In addition to the financial state of the business, consider the impact to your personal finances. While having a lump sum payout may or may not set you up for life, don’t overlook the fact that you are simultaneously cutting off your personal cash flow. Even with money in the bank, many entrepreneurs find it a mental, emotional and/or financial struggle when losing the consistent income that they are accustomed to receiving from their business.
Lastly, think about your future role in business and in life. Many buyers want the previous owner to stay on during a transition period. Are you willing and able to fulfill this role? Do you have a vision for what’s next for you in life?
In the end, selling your business can be a great idea if it aligns with your personal and financial goals. However, it’s a complex process that requires careful consideration and planning. If you’re unsure, consider seeking advice from a business advisor or coach. They can provide valuable insight and help guide your decision-making process.
Where is the best place to sell a business?
The best place to sell your business largely depends on the type of business you’re selling. For small to mid-sized businesses, there are different business marketplaces such as BizBuySell, LoopNet or BusinessBroker.net that offer platforms where you or your broker can list your business for sale. They have wide-reaching audiences that can help you find potential buyers.
If your business is larger or more specialized, you might want to consider hiring a business broker or M&A advisor, who can leverage their network and resources to find the right buyers. Local industry trade groups or professional networks may also be useful avenues to find potential buyers within your specific niche.
How long does it usually take to sell a business?
Selling a business can take anywhere from a few months to a few years, depending on various factors such as the size and nature of the business, the state of the market, and the seller’s readiness and motivation. If you run a small business in a popular industry, the process might go quickly while a larger or more specialized business may take longer to find the right buyer.
Preparation is key to speeding up this process. That includes getting your financial documents in order, getting a professional valuation, and preparing a value-based sales pitch. It’s also helpful to have a team of professionals, like a business broker, coach, lawyer and accountant, who can guide you through the process and help you navigate any challenges that arise.
When is the best time to sell my business?
The best time to sell your business is when both you and your business are ready. From a personal perspective, this means when you’re mentally prepared for the sale and ready to move on to new ventures or your next life chapter. From a business perspective, it’s optimal to sell when your business is in a strong financial position, showing consistent profitability, growth potential, and a solid customer base.
Market conditions can also influence the timing. A strong economy or a high-demand period in your specific industry can make your business more attractive to potential buyers and possibly demand a higher selling price. However, each situation is unique, and it’s advisable to consult with a business advisor or coach to make the best decision.