Every small business owner pours more than long hours into their company to make it succeed. There’s plenty of tears, sacrifices, and struggles to make a small business stand on its own two feet—all of which make the decision to sell all the more complicated.
Selling a small business can be a complicated process, both emotionally and logistically. You’ll have to get your organization in tip-top shape before entertaining serious offers, make sure that your financials are rock-solid, and invest a little bit of money and sweat equity into making your business look as strong as ever.
If you’re wondering how to sell your small business, but don’t quite know where to begin, there are a few tried-and-true to-do list items to cross of your list early. Here’s what goes into selling a small business, and how you can prime yourself for a great deal, as well.
8 Steps to Selling a Small Business
Step 1: Clean up Your Financial Records
Before you dive into any potential scenario in which selling your small business becomes a reality, you’ll want to make sure your bookkeeping is spotless. This isn’t just good advice for keeping your own sanity intact during the sales process, it’s also vital for getting a fair deal for your company. Selling a small business means that you’re going to have a ton of eyes on your financials—this includes lawyers, accountants, business valuation specialists, and your prospective seller, as well as others who may become involved in the sale.
Work with your small business accountant (or, hire an accountant if you don’t have one already) to help make sure your financial information is in great shape. You’ll need to provide, on average, three years’ worth of tax returns and financial statements as part of your sale. Also, be ready to account for all company income during this period as well, as any missing money sends a red flag to prospective buyers. Don’t be surprised if you’re asked to provide year-to-date financials when selling your small business either: Owners want to know that they’re investing in a thriving company, rather than one in financial turmoil.
Step 2: Bring in a Valuation Expert
There are easy ways to determine the value of your small business if you put it up for sale, but that doesn’t mean that they’re the best (or easiest) calculations to make. When selling a small business, you can expect to price your company anywhere from three to six times your current cash flow. That’s a helpful place to start, but there’s a massive difference between the low and high ends of this range. Especially when you factor in other considerations, such as the market for similar sales and overall industry projections.
Third-party valuators can help you get a more precise figure. For a flat fee, these agencies will help you price out the actual value of your company, based on sales, revenue, outstanding invoices, inventory, and debts. Plus, a third-party valuation mitigates the risk that a seller might argue with you about your company’s valuation, since you’ve brought in a pro to help you figure out a fair price based on the company’s real worth and market conditions.
Step 3: Get an Exit Strategy in Place
Savvy business owners should know exactly how they plan to wind down their involvement in a company they own once they sell. Even better, every small business owner should have a contingency plan in case they have to part with their company unexpectedly or be forced into a situation where selling is the best—if unexpected—option.
Any time you’ve built your business to surpass your rivals in terms of financial strength, stature in the market, or long-term viability, you should have a plan in place for how you would sell, and how this decision might impact your personal finances. Every exit strategy should have a few essentials: a succession plan for who might take over the day-to-day operations if you sell (and the buyer retains the existing staff), an understanding of what possible pitfalls or pain points exist and how to correct or manage them, and a sense of how much you’d need to make from the sale in order to cover your family finances.
Step 4: Spot Real (and Suspicious) Buyers
Not every offer to buy your business is going to be made in good faith. Selling a small business requires owners to provide tons of sensitive financial and proprietary information. These details are worth a fortune to your competitors, and can help them get better insights into your company if their offer isn’t a genuine one. If you’re too forthcoming early in the process, you may risk giving up information to a rival without a sale actually happening. The same is true if you try to go it alone and don’t enlist the help of a third party to keep your data safe.
Any time you field an offer to buy your business, know who you’re dealing with and how serious they are about making the purchase. Not every business competitor will have nefarious intentions, of course, but it’s important to know who you’re dealing with and whether the buyer’s aspirations seem in line with the offer they make. One way to help safeguard your secrets is a non-disclosure agreement. NDAs prevent buyers and sellers from using sensitive information to undermine one another, and forbid the transmission of information to other parties for as long as the NDA is in place. Consider enlisting the help of an attorney to serve as an arbitrator. Legal professionals often keep sensitive documents in their offices and only allow parties to view these materials on their premises. This helps protect against someone prying through your financials without supervision.
Step 5: Push to Increase Sales
There’s a reason why people spiff up their used cars before they try to sell them. Making your asset look as good as possible before a sale can help increase your asking price. The same is true when selling a small business. If you’re able to show that your sales are trending upward as you prepare to exit, you’ll signal to would-be buyers that your company is in great financial shape with plenty of room to grow. That, in return, helps you get a higher selling price.
Invest a little extra effort in boosting your sales through extra marketing, advertising, or through referral programs with existing clients. This can help you rev up your sales figures when you’re getting ready to make a deal. Plus, it puts your buyer in a solid position to carry momentum once they’re at the helm.
Step 6: Recruit a Sales Professional
When we say sales professionals here, we’re not talking about someone to help you bring in new clients and revenue. Rather, we’re talking about finding a business broker who can help shepherd you through the process of selling your company. Just as you’re an expert at your chosen industry, so too are business brokers when it comes to getting their clients excellent deals when selling a small business.
Business brokers can help you take care of all the big and small tasks that come with selling your company. They’ll valuate your company, create a prospectus for buyers, and scour the market to help you find interested buyers. And on the buyer’s side, brokers can often help prospective purchasers access the money needed to buy a small business. Granted, this help doesn’t always come cheap: Brokers charge anywhere from 5% to 10% of the total sale price, which means you’ll have to be okay with giving up a slice of the pie in exchange for the extra help.
Step 7: Get Contracts and Lawyers Involved
Odds are that you already have a lawyer on hand who has helped you steer the deal toward completion, particularly if you’ve gotten an NDA in working order. Since you’re inching ever closer to the actual sale by this point, you’ll want to make sure you have a lawyer in your corner to help you draft and review your sales contract. You could, of course, draft your own sales contract, but this leaves you vulnerable to unforeseen issues that could have otherwise been avoided with the help of legal counsel.
If you already have a small business lawyer associated with your company, great. You may want to make sure that they’re competent and comfortable with contract law, as not all lawyers share the same specialties. If your lawyer is not a pro at contract law, consider asking for a reference for someone who focuses on this area. Paying to bring another lawyer into the fold won’t hurt half as much as paying for any unintended consequences that come from putting a less-than-stellar contract into effect with a buyer.
Step 8: Make Sure You Get Paid Up Front
You’re nearly at the finish line: Your financial stats are up to code, you’ve gotten a buyer lined up, and your contracts are in review and nearly ready to go. Now, you need to tend to the actual sale terms. Make sure your agreement has you getting paid up front as part of the deal. You’ll want the money up front for several reasons: to let you walk away from the business according to your exit plan, to help you pay for fees associated with the transaction, and to ensure that your buyer has the money needed to fulfill their side of the deal.
Not getting paid up front can create several challenges for a seller. You risk your buyer not providing you with the full sale amount over time, which only becomes more difficult to get once the deal is done and you’re no longer face-to-face with the buyer on a frequent basis. Allowing the buyer to pay in installments also leaves you vulnerable to any financial issues the business might face under new management. Say, for example, that the buyer runs out of money to keep the business afloat. In that case, there simply won’t be money left to give to you, which means protracted legal issues or walking away with only a portion for the full sum you’re owed.
Bonus Step: Keep Emotions out of the Deal
Selling a small business comes with a lot of decision making—most of which can feel very personal. After all, you’ve put years of work into building a business, and walking away at any price point can be an emotional challenge, as well as a financial one. That’s even more true if you’re selling your business to a competitor, which can cloud your judgment and interfere with more practical and pragmatic considerations.
Keeping emotions at bay won’t be easy in most cases, and it’s alright to struggle with the decision to sell. The most important thing is to keep emotions out of the practical decisions you have to make once you’ve committed to selling, and to make sure you’re putting your best interests at the forefront.
Selling a small business can feel as complex as starting one. There are books to settle, finances to track, and pressure to do so in a way that gets you the best possible outcome for your efforts. But just as you were able to start a business, so too can you sell it and walk away with hard-earned cash for your efforts. So long as you make sure to take a few necessary steps, you can ensure you’re getting the best offer possible. Plus, you’ll be able to do so with minimal hassle.
- Entrepreneur.com. “What Every Entrepreneur Should Know About Valuations“