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How To Sell A Business – Step-By-Step

Maryn Williams • Oct 09, 2019

Step-By-Step Process on How To Sell A Business

selling a business
Your blood, sweat, tears, and emotions are part of your small business, and it can be difficult to let it go. You have worked for countless hours and made endless sacrifices, but now you are finally ready to turn it over to a new owner. If you are at the stage where you are starting to think about selling your small business and move on to bigger and better things, you probably need some expert advice.
 
Every single business purchase, regardless of scope and size, will generally follow the same necessary steps during a sale. While these steps can be of varying scope, have different names, or some may not apply to you, selling a business will generally follow the same process every time. As a business owner, you want to get the most out of your investment, so please take care to follow the proper procedures.

Step 1: Decide On Experts And Professionals

You will more than likely need help when selling your business, and you need to be careful when selecting who will help you. Depending on the situation, the expertise needed to sell a business may require a different set of professionals than those who have helped you operate your business. Take your time to interview and hire the right people for the job, such as accountants, lawyers, and brokers, as you want to make sure you can trust these people with your investment. Your broker can make some suggestions for CPAs and Attorneys who specialize in your industry.
 
During this step, your accounting professionals will go through all of your financial records and make sure the files and documents are as accurate and orderly as they should be. Generally, the Listing Broker will engage a closing attorney to draft the closing documents that align with the terms and conditions that you have agreed to with the Buyer in coordination with the Broker. The Buyer and Seller split the cost of the closing attorney. You will also want to have your own attorney review these documents.

Step 2: The Evaluation And Exit Plan

The role of your CPA/accountant and Broker differ. While a CPA or professional appraisal service can provide you with a full official appraisal of the value of your business, these can often be expensive and do not necessarily relate to the “market value” of your business when sold. A skilled Business Broker is selling businesses as their sole function and are going to provide you with the “Most Probably Selling Price Range” of your business when you take it to market. An experienced Broker will prepare a comprehensive pricing analysis on your business. This approach to the assessment includes both quantitative and qualitative analysis.

The quantitative piece of an assessment is the conclusion reached by driving financial data through a series of formulas and assumptions. To do this, the Broker will recast your business entity’s financial statements using the tax returns and other information you provide. The Broker will remove the non-cash expenses, adjust owner draw and wages, and sometimes adjusted other line items to closer align with market terms. He or she will then take the three-year weighted average of these financials.

If you own the real estate for your business, it is best to use a Business Broker who is also an experienced Commercial Realtor as he/she can also evaluate the real estate for sale or lease, depending on your plans and goals or which options make the most sense in the economic environment. After reviewing the financial information, you provided, the Broker derives some calculations of value based on Capitalization of Earnings, Debt Capacity, Liquidation, and the potential for a Strategic Buyer.

The qualitative assessment takes into consideration weighted risk factors such as -> Continued Earnings Risk, Company History Assessment, Growth Projection, Competition Analysis, Business Expansion Opportunity Assessment, Barriers to Entry for New Competition, Customer Base Sensitivity, Importance and Dependence on Current Owners, Business Location/Lease, Purchase Financing Likelihood by Sellers or Banks, Industry Strength, Demographics of Middle TN and Economy, New Owner Social Desirability, etc. 

Timing! Ideally, a business owner will start connecting with these professionals 3 months to 3 years before they plan to sell or retire. This allows time to tweak the business to maximize the value and render a smooth transition. Often, the owner needs to start making plans to pull yourself out of the operations slowly by delegating pieces of the operation to other staff members or by cross training staff. Make sure you plan accordingly by getting advice from multiple experts. Your Broker can help you!

Step 3: The Offer, The Buyer, And The Closing

Once you have your valuation and legal requirements in order it is time to look for a buyer. A business broker will have ways of marketing the company. He or she will have an extensive network of potential buyers to connect with. They will also market the business very confidentially on multiple external “Business for Sale” websites and on social media and through direct mail and marketing. For most businesses, it is critical to market your business very confidentially so your staff, your clients and your customers are not aware of the business sale during this process. If word gets into the wrong hands, you risk an employee or client leaving. For this reason, choose a Broker with high integrity, a large network of buyers, and one that has a proven record for success!
 
Interested buyers will inquire on your business and sign a non-disclosure agreement and complete a personal financial statement before receiving any information on your company. Your broker will have prepared a Confidential Information Memorandum on the business sale opportunity which he/she will share with screened prospective Buyers. The broker will also likely interview the prospect and will bring you in on a meeting for the highest and best prospects. The right buyer will submit a qualifying offer, in the form of a Letter of Intent, and it is up to you and your advisors to negotiate a deal that makes both sides happy.

Once the Letter of Intent is negotiated and signed, the buyer will continue their due diligence to study the business in more detail. They will likely review all tax returns, P&L statements, contracts, vendor terms, lease terms etc. during this process which can take up to 60 or even 90 days. Once all due diligence has been signed off on and all contingencies met, you will sign paperwork for the transfer of assets or stock and then you have officially sold your small business. Following the sale, it is often expected that the sellers stay on for a negotiated period to train and transition the new owner. After that, you are free to move on to other adventures.

Onwards And Upwards

While there are many intricacies to selling your business that will come up during the sale, this basic process will give you a path to follow. While selling your business may seem as daunting as it did to get the company up and running, if you have the right team people behind you, you can walk away with a deal that will make all of your effort worth it.
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