Are you thinking of selling your business? The process of selling a small business can be complex, expensive, time-consuming and emotionally exhausting.
If you are considering selling your company, but you don’t know how to do it, we have designed this step-by step guide to educate you about the process of how to sell a business so you can get a fair price and achieve a successful sale.
How to Sell a Business: Step-by-Step Guide
Step 1: Determine the value of your company
Calculating the value of your business can take a long time. We recommend you request the valuation from a professional: a third party can offer you a realistic quote and provide you with the proper advice on how to sell a business.
A qualified expert can evaluate your company and its circumstances. This valuation is based on factors such as your income, accounts payable, inventory, and all your assets. The goal is to identify potential threats to your business and opportunities that can generate value.
A small business can be worth between three and six times its annual cash flow. It all depends on your financial status, the trends in the industry, the demand, and other variables.
Based on the study of these factors, the expert will give you a detailed evaluation of the value of your business. This document will serve to give credibility to the asking price.
Step 2: Put your business finances in order
Make sure all business records are up to date. Potential buyers will want to see the profit and loss statements from recent years, bank statements, tax returns, contracts with suppliers, and customers’ data.
You should also be able to show your business projections for the next few years; they provide future opportunities that could contribute to the success of the company.
To gather all these documents, and to receive better guidance on how to sell a business, hire the services of a professional accountant. If your financial statements are not in order or transparent, potential buyers will lose interest in your company.
Step 3: Prepare your exit in advance
Selling your business may not be part of your plans, but sometimes the conditions in the market leave you no choice. If you are forced to sell your business or leave unexpectedly, a contingency plan will help you mitigate any negative impact on your personal finances.
A business exit strategy must meet these conditions:
- If you decide to sell, choose a trusted employee to handle the daily operations of the business. It is a logical decision because someone who has worked in the company knows the customers as well as the strengths and weaknesses of the business.
- Be prepared to stay a little longer in the business after selling it. It is quite frequent that this is stipulated in the sale agreement while the buyer learns the details of the operations.
- Also, if the buyer comes from another industry, there should be enough transition time for the new owner to feel comfortable in a new industry.
- After selling your company, you will have a considerable amount of money in your hands. Decide wisely how you are going to invest: in a new venture, in a retirement fund, to cover family finances?
Step 4: Increase your sales
A business with high cash flow is more attractive than one with low sales. This is a sign for potential buyers of the demand for the company’s products or services. Also, high sales inspire trust in the future of the business after the purchase.
One strategy that you can use to increase your sales is to launch a new product. Thus, you can expand your offer of services, or implement a digital marketing campaign.
It is also important to diversify your customer base. Something that makes buyers uneasy is finding out that a high percentage of sales comes from only one or two customers. This could make them believe that the income could be significantly reduced after closing the sale.
Step 5: Hire a business broker
Finding potential buyers and negotiating with them can take more time than desired and can take you away from your daily responsibilities. Hiring a professional to help you with the sale can be a practical move, and business brokers know the ins and outs on how to sell a business.
These agents not only have the means to find the right buyers for your business, but they are also experts in negotiating the best price for you.
All the above comes to no surprise: business brokers charge a commission between 5 and 10 percent of the sale price.
These are the main tasks of a commercial broker:
- They perform a business valuation and ensure the sale price is fair.
- They keep a record of all communications between the buyer and the seller throughout the process.
- They carry out research on similar companies in the market to ensure the sale price is appropriate.
- Based on the market analysis, they create a marketing strategy to sell the business.
They find potential buyers.
- They explain to the buyer how the company operates, and they help negotiate the price.
- They ensure that all parties involved in the sale are aware of all information related to the agreement.
- They gather the necessary documents for the sale and keep them safe.
- They provide advice on financial and legal aspects during the process, such as transfers and contracts.
- They provide assistance after the sale if necessary.
Step 6: Find the right buyer
Finding the right buyer can be a challenge. Before any offer is made, you must be careful and make sure that the intentions of the buyers are serious.
Generally, this type of transaction is financed with loans from third parties such as banks and backed in many cases by the US Small Business Administration, or SBA. Moreover, some banks ask sellers to help with part of the financing to complete the transaction.
One of the main causes of the failure of this type of agreements is the inability of potential buyers to access financing. For this reason, pre-qualifying them is the first step in identifying the most compelling offers
These are other recommendations to streamline the buyer selection process:
- Consider more than one potential buyer. Thus, if the negotiations with one buyer fail, you can start negotiating with the next one on the list.
- Always stay in touch with potential buyers.
- Find out if the buyer pre-qualifies to receive financing before moving ahead with the sale. If you plan to finance the sale, ask for the assistance of a lawyer or a professional accountant. These professionals offer advice on how to sell a business, to achieve a satisfactory agreement with the buyer.
- Leave room for negotiations, but stay firm at a reasonable price.
- Any agreement must be in writing. Potential buyers must sign a confidentiality agreement to protect the information of your business.
Step 7: Make sure the contracts are in order
Contracts are part of the legal paperwork necessary to sell a business. To close the deal, there must be a legal contract for the sale and purchase of the business property, including all assets and intellectual property.
This document, which can be up to 50 pages, is composed by a list of assets, agreements with employees and guidelines on the use of domain names of websites, among other aspects.
At this critical time when finalizing the sale gets closer, you should have a lawyer to help you write and review your contract. These advisors are the most qualified in how to sell a business, and in these instances, they can eliminate any vulnerability that exposes you to legal problems with the buyer.
Where Can You Sell Your Business?
You can sell your business on your own to a family member or a trusted employee.
You can also hire a business broker if you want to attract several buyers and get the best possible sale price. In this case, there are specialized sites that can advise you on how to sell a business and carry out the whole process:
Ideal for companies with annual profits of less than $300,000. You must pay a fee of $49.45 per month, but the benefits offered by this site may be worth it:
- This platform has the broadest reach, allowing your ad to reach a large number of potential buyers.
- You can add photos, videos, and maps to your ad, which will make it more attractive to potential buyers.
- A price evaluation of your business is included in the fee you pay for placing your ad.
- On the website, you can download a free guide with all the information you need to sell your business.
This site is the best alternative for businesses with annual profits between 1 million and 50 million dollars. These are some of its features:
- You can show your ad to thousands of pre-qualified buyers.
- You can estimate the value of your company through a free evaluation.
- You can highlight all the strengths of your company with your ad.
- To access the website services you must send a request for a valuation. An agent will contact you to ask you for additional information, and after reviewing your business, they will offer it to potential buyers.
Selling a business can be as complex as starting one. However, the right techniques can bring you the best possible offer. Put your records in order and make sure you get professional advice, as well as prequalify buyers.
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