Expert Business Advisors Jay Cash and Cody Muenster break down key steps to selling a business that you can use to ensure you have a successful sale.
Business owners pour countless hours into their company to achieve success, but at some point, it could be time to sell your business. Believe it or not, the best time to think about selling your business is the day your business opens. Starting your company with a growth mindset helps you consider how selling your business could play out.
Without the right experience, you might not know how to sell your business in today’s market. There are many steps to take beforehand that can help ensure that both emotional and logistical considerations don’t hinder the process. At Cultivate Advisors, we have experience helping clients develop and execute a successful exit strategy to sell their business. We will guide you through the process below.
Think of Your Exit Strategy Before Selling Your Business
The first step to selling a business is to think about your exit strategy. There are so many factors that can dictate how selling your business will unfold. You can think of selling your business like you’re selling a home; what is the market like, and what can you do to make your business more appealing to potential buyers?
Consider your dream scenario and the steps you’ll need to achieve it. For example, even if you already have a contingency plan in place, it’s always important to consider how and when you would sell the company and how this impacts your personal finances.
All good exit strategies include some essentials:
- Have a plan for who would take over daily operations.
- Understand the possible pain points and how to overcome them.
- Your ideal selling price or a minimum dollar amount that you’d consider to cover your necessary finances.
Determine the Value of Your Company
Once you have a sound exit strategy in place, you’ll want to determine your company’s value. If you’re wondering, “how much should I sell my business for?”. The answer will always change. As our Advisors hinted at above, the market will dictate your business’s worth. If you’ve decided to sell, conduct thorough research on similar companies in your area and what they are selling for. However, this approach may not be ideal for how to value a small business (add a link to How to Value a Small Business: 4 common methods) as it can be tricky to find direct competitors depending on your vertical.
Another method of determining your business’ value is through EBITA, or earnings before interests, taxes, and amortization. This is a way that investors measure how profitable a company is and can be used to compare business value. EBITA showcases an accurate view of how a company performs over time, removing many factors that could distort the performance.
Clean Up Your Small Business Accounting Records
Before selling your business becomes a reality, you’ll first want to turn your attention to your accounting and bookkeeping. This is one area of your business that needs to be spotless before moving forward with a sale. Not only are clean financial records essential for obtaining a fair deal, but they will keep you sane during the sales process.
When selling a business, there will be more eyes than ever on your records. Make sure that you hire the right team to assist you with the process; you’ll want to hire lawyers, accountants, CPAs, business valuation specialists, and other key players who might help with your sale.
For example, you’ll need to provide at least three years’ worth of tax returns and financial statements to sell your business. It would be best if you also were mindful of the company’s overall income during this period so prospective buyers feel good about the situation beforehand. Generally speaking, it is best to stop any personal spending through the business at least three years before you plan to sell.
Make Your Business Attractive to Potential Buyers
If you’ve ever sold a house or a car, you understand the importance of cleaning things up and getting them in the best possible shape before you hit the market. The same can be said for how to sell your company.
You’ll want to ensure that your sales are trending upward during your preparation. One way to do this is by hiring the right team of experts who can help your business shine. Having the right team in place is a positive sign to potential buyers that your company is fully operational yet still has plenty of room to grow.
If you have a physical office space, don’t overlook its appearance. Simple updates such as making sure all of the lights work, there is fresh paint on the walls, and cleaning up any garbage can help make your business that much more appealing.
Involve a Professional Broker In Selling
You might wonder how to sell a small business without a broker, as it can be tempting to avoid giving up more money than you need to. There are pros and cons to hiring a broker.
But first, let’s establish what a broker is and how they can help. Brokers act as guides throughout the entire process of selling a company. They are experts in negotiating and securing deals on behalf of their clients and understand the ins and outs of the market. When a broker is involved, they can ensure that the sale is fair and often make points that others in the business wouldn’t think to make. One small point that your broker brings up could make a significant difference in how much you get for the company. If you aren’t a business expert or you don’t have the time to go through the process of selling, it could be worth it to hire a broker.
On the other hand, professional brokers take anywhere from 10-12% (or more) of the gross sale price. This adds up! Feel free to shop around for different brokers and compare skills and costs to get the most accurate valuation possible.
Qualify Your Buyers and Find a Perfect One
This step in selling a small business is all about the financials. Unfortunately, not every party interested in purchasing your business will have the financial credibility necessary for the sale. Keep in mind that both the buyer and the seller need to have a financial history to qualify for the loan.
When you’re selling your small business, it requires that business owners share essential details such as financial records and other proprietary information. If one of your competitors gets ahold of this information, it can become catastrophic to your company. So always be careful when you’re giving up your data, especially if the sale doesn’t go through.
Every time you get an offer, make sure you know more information about the interested party and understand whether or not they are serious about the deal. Many business owners opt for a safety net to protect themselves such as an NDA, or non-disclosure agreement. This prevents buyers and sellers from using sensitive company information against one another. For an NDA, you’ll want to turn to a legal professional.
Be Ready for Due Diligence
If you’ve found a potential buyer who could be a great candidate to purchase your business, the next step is due diligence or a formalized agreement between the seller and the potential buyer. During this process, the buyer can see additional information about your business so that they can put together a purchase offer.
The due diligence process outlines information such as:
- A company organization chart.
- General information such as how many employees you have.
- Employee agreements that are in place with your employees and managers. This can help potential buyers decide how they would structure a plan to incentivize key players to stay at the company.
- Customer agreements that outline pricing and how many units are sold to the customer in a given year.
- Vendor contracts if you have vendors that offer materials and services to you.
Once you decide to sell your business, start compiling the right documents for due diligence.
Negotiate the Terms and Sign the Contract
As soon as a business value is determined and you’ve found a qualified buyer, the next step to selling a business is to negotiate the terms and sign the contract. As you get closer and closer to the sale of your company, make sure that you have a trusted lawyer on your team to help you with the sales contract. While it’s possible to draft your own sales contract, doing so could leave you vulnerable to unforeseen circumstances that would have been easily avoided. Even if you already have a small business lawyer working for your company, make sure they are well-versed in contract law.
Some small businesses rely on business-selling websites. If you opt for this route, consider looking at ads for similar businesses and see the type of language they use to promote themselves. This can give you insight on how to put your best foot forward.
Let Cultivate Advisors Support You Along the Way
Cultivate Advisors has extensive experience in how to sell your business. We’ve worked with thousands of business owners and have the knowledge to help you get the highest price for your company. Our tailored approach will guide you toward your vision and destination!
To get started, we encourage you to schedule an initial call for a free assessment.
How to sell a small business without a broker?
How long does it take to sell a business?
As soon as you know you’re going to sell the business, you should operate the business as you would for the next 5-10 years. Plan for explosive growth and step on the gas as much as possible to grow the business for a larger return on investment. You should also avoid spending money on things that won’t get paid back within 12 months and cut back on unnecessary staff before selling to reduce costs.