How do I sell my business? Your How-to Guide for Selling Your Small Business

“How do I sell my business?” Are you in the market to sell your small business and just ventured to Google to begin your journey? Whether you've owned and sold multiple businesses or are in the market to sell a business for the first time, the journey of selling your business comes with its own set of challenges and opportunities.

This guide aims to equip you with practical steps and valuable insights to ensure your transition is smooth and successful. Let’s dive in.

Step 1: Understand Your Motives and Prepare Yourself

Before beginning the process of selling your business, it’s important to spend some time understanding what are your core motives and what are you look at gaining from this experience.

• Why are you looking to sell your business?
  • Why are you searching for "sell by business" today? Are you looking to retire, move on to another venture, or free up capital for personal reasons?
  • Understanding your motives will help you stay focused and make better decisions throughout the selling process.
• Are you ready for the emotional and practical aspects of selling?
  • Selling a business can be an emotional roller coaster, especially if you have invested years into building it.
  • Be prepared for the attachment you might feel and the practical changes that will follow the sale. We suggest keeping a journal and writing down these thoughts and feelings throughout the process of selling your business - to work through the very real emotions that can accompany a business sale.
• What are your financial expectations?
  • Determine the financial outcome you aim to achieve from the sale.
  • This will guide your valuation and negotiation process.

By answering these questions, you can set clear objectives and mentally prepare yourself for the selling process. Remember, these questions are just the beginning. Take the time to think through all the information you'll need to understand before selling your business.
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Step 2: Value Your Business Accurately

Understanding the true value of your business is crucial. Just as Zillow provides tools for homeowners to accurately value their properties, you need to find similar tools and resources to obtain a proper valuation for your business.

Overvaluing can deter potential buyers, while undervaluing can result in a significant financial loss. This is where our team at SMB can help. Our valuation tools and resources will help you obtain an accurate valuation for your business so you know exactly how to price for the optimal exit.

Here are some additional methods for obtaining a proper valuation:

1. Earnings Multiplier (or Price-to-Earnings Ratio):  
   • This method involves multiplying the business's earnings before interest, taxes, depreciation, and amortization (EBITDA) by an industry-specific multiplier.
   • This reflects not just current profitability but also future potential.
2. Asset-Based Valuation:  
   • Here, you calculate the value by summing up all the business assets (both tangible and intangible) and subtracting the liabilities.
   • This method is particularly useful for businesses with significant physical assets.
3. Discounted Cash Flow (DCF):  
   • This approach forecasts the business's future cash flows and discounts them back to present value. This can be more complex but offers a dynamic view of the business's potential.
4. Market Comparisons:
   • Look at similar businesses in your industry that have recently sold to get a ballpark figure for your business's value.

Consider hiring a professional business appraiser to ensure your valuation is accurate and justifiable. A professional appraiser brings expertise and an objective perspective, which can be invaluable in establishing a credible valuation. This will provide a solid foundation for negotiations with potential buyers, helping to justify your asking price and facilitating a smoother transaction.

Also, keep coming back to SMB for more insights into each of these methods and additional tools to help you value your business. At SMB, we offer a range of resources and expert advice to guide you through the valuation process. Whether you need detailed market analysis, valuation calculators, or access to experts, we are here to support you every step of the way.

By leveraging these resources, you can ensure that you have a comprehensive and accurate understanding of your business’s worth, making you better prepared for a successful sale.

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Step 3: Prepare Your Business for Sale

Before putting your business on the market, have you taken the necessary steps to ensure it is in the best possible shape? Just like preparing a house for potential buyers, you need to get your business ready to impress. To attract buyers and achieve a higher selling price, it's crucial to ensure your business is fit and ready to show off.

Financial Shape-Up:

• Make sure that your financial records are organized and updated. Ensure all statements, tax returns, and balance sheets are collected, accurate, and up to date.
• Why is this important? Clean financial records instill confidence in potential buyers and make the due diligence process smoother.

Build into Operational Efficiency:

• Are your business operations as streamlined as they can be? Ensure that all critical and operational processes are well-documented and that the business can run smoothly without your direct involvement.
• Write down what you’ve done to improve your business! Highlight any improvements or efficiencies that make your business more attractive to buyers.

Highlight Customer and Supplier Relationships:

1. Are there strong relationships with key customers and suppliers in place? This stability will be a selling point.
2. Showcase them! Ensure to showcase customer loyalty and long-term supplier agreements to potential buyers.

Legal and Compliance Preparation:

• Make sure your business is in compliance with all relevant laws and regulations.
• Resolve any pending legal issues before listing your business for sale.

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Step 4: Find a Business Broker

A business broker can be invaluable in the selling process. They have the expertise, network, and resources to connect you with serious buyers and facilitate the sale.

How to select the right broker?

• Look for brokers with experience in your industry.
• Check references and reviews from previous clients.
• Understand their fee structure and what services are included

‍Why should you use a business broker?

• Business brokers have access to a larger pool of potential buyers.
• They provide assistance with valuing your business accurately (and we help support them with tools and resources!).
• Brokers can help with marketing your business to attract qualified buyers.
• They are typically skilled at negotiation and will support you in to securing the best possible deal.

At SMB, we can match you with a local broker in your area who is most qualified to help. Our network of experienced brokers is ready to provide personalized support and guidance. Contact us to get the process started.

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Step 5: Market Your Business

Effective marketing is crucial to attracting the right buyers. Here’s how to present your business in the best light:

Create a Business Profile:

• Develop a comprehensive profile that includes key details about your business, such as its history, products/services, financial performance, and growth potential.
• Highlight unique selling points that set your business apart from competitors.
• At SMB, you'll get a beautiful profile page that showcases everything needed to sell your business successfully.
  

Need to keep the sale of your business confidential? No problem. You can use blind profiles to describe your business without revealing its identity. Alternatively, you can keep your business profile off-market while still accepting offers from interested and qualified buyers.

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Use Multiple Channels:

• List your business on online marketplaces like SMB, where we connect owners/sellers with either brokers or buyers.
  • SMB offers tools to increase your business's marketing reach and help buyers find your business..
• Leverage your broker’s network and industry connections.
• Consider discreetly approaching potential strategic buyers within your industry.

By utilizing these tools and resources, you can maximize your business’s visibility and attract the right buyers, ensuring a successful sale.

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Step 6: Screen Potential Buyers

Not all interested parties will be the right fit for your business, your employees, your legacy.

Screening potential buyers is essential to ensure they have the financial capability and intent to follow through with the purchase. Properly vetting buyers will save you time and ensure a smoother transition.

Only Deal with Qualified Buyers:

• Non-Disclosure Agreement (NDA):
  • Require potential buyers to sign an NDA before sharing sensitive information. This protects your business’s confidential details and ensures serious interest.
  • An NDA also builds trust, showing buyers that you handle transactions professionally.
• Financial Capability:
  • Assess the financial capability of potential buyers by requesting proof of funds or pre-qualification letters. This ensures they have the necessary resources to complete the purchase.
  • Verify their financial statements and credit history to confirm their financial stability.
• Background and Experience:
  • Evaluate the background and experience of potential buyers to ensure they have the skills and knowledge to run your business successfully.
  • Consider their experience in your industry and their track record with previous business ventures.
  • Interview potential buyers to gauge their understanding of your business model and their plans for its future.

How to Screen Potential Buyers:

• Initial Screening:
  • Conduct an initial screening based on the information provided in their inquiry. Look for red flags such as vague responses or reluctance to provide financial details.
  • Prioritize buyers who demonstrate a clear understanding of your business and have a well-defined acquisition strategy.

• In-Depth Evaluation:
  • After the initial screening, conduct a more in-depth evaluation of qualified buyers. Schedule meetings or video calls to discuss their interest and plans in detail.
  • Use this opportunity to ask specific questions about their experience, financial situation, and vision for the business.

• Professional Assistance:
  • Work with your broker to conduct thorough background checks and financial assessments. Brokers have the expertise and resources to verify buyer information and provide valuable insights.
  • Engage your lawyer to review the legal aspects of the buyer’s background and ensure there are no legal issues that could complicate the transaction.

‍How to Assess Buyer Intent to Ensure a Proper Match is being Made:

• Motivation:
  • Understand the buyer’s motivation for purchasing your business. Are they looking for a long-term investment, or do they plan to flip the business for a quick profit?
  • Buyers with a clear and aligned motivation are more likely to follow through with the purchase and successfully manage the business.

• Commitment:
  • Evaluate the buyer’s commitment to the acquisition. Are they prepared to invest the time and resources needed to complete the transaction and transition smoothly?
  • Look for buyers who have a well-thought-out plan and demonstrate genuine interest in your business.

Don’t Forget Your Own Due Diligence:

• Documentation:
  • Ensure all necessary documentation is prepared and available for review. This includes financial statements, tax returns, operational details, and any legal documents.
  • Provide transparent and accurate information to build trust and facilitate a smoother due diligence process.

• Site Visits:
  • Invite qualified buyers for site visits to give them a firsthand look at your business operations. This helps them understand the day-to-day activities and assess the business environment.
  • Use this opportunity to answer their questions and address any concerns they may have.

By carefully screening potential buyers, you can ensure that you find the right fit for your business, leading to a successful sale and a positive transition for all parties involved.

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Step 7: Due Diligence

We talked a little about due diligence in the previous step, but since this is a critical phase in the selling process, we wanted to spend more time on it.

Ensuring that the buyer thoroughly understands your business is fundamental to a successful sale.

What do you need to have or prepare for due diligence?

Financial Due Diligence Items:

• Financial Statements: You will need to provide the last 3-5 years of financial statements for analysis. Ensure these are accurate and up to date.
• Tax Returns: Offering tax returns to verify the financial statements' accuracy can help the buyer gain further trust in what they are purchasing.
• Profit Margins: Document and highlight the consistency and trends in profit margins over time.

Legal Due Diligence Items:

• Pending Litigations: Do you have any ongoing or pending lawsuits against the company? Disclose them.
• Contracts and Leases: Prepare and provide all binding agreements, including:
  • Leases
  • Vendor contracts
  • Customer agreements

Operational Due Diligence Items::

• Business Operations: Document & provide an overview of the day-to-day operations and the efficiency of business processes.
• Employee Structure: Detail the organizational structure, employee roles, and qualifications.
• Customer Retention: Highlight customer retention rates and customer satisfaction levels.
• Vendor Contracts: Offer terms and relationships with key suppliers.

Market and Competitive Analysis:

• Market Position: Assess the business's position within the industry and its market share.
• Competitor Analysis: Identify key competitors and compare their strengths and weaknesses relative to your business.

There may be other items that you will need to provide during the due diligence phase. Your broker can help walk you through this so that it is as painless as possible.

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Step 8: Negotiate the Deal

Negotiating the sale of your business can be complex. It’s important to approach negotiations strategically to achieve a favorable outcome. Successful negotiation involves balancing your financial goals with the buyer's interests to reach a mutually beneficial agreement.

Key Considerations & Best Practices:

• Price and Terms:
  • Be clear about your minimum acceptable price and preferred terms before entering negotiations. Know your walk-away point to avoid unfavorable deals.
  • Be prepared for counteroffers. Negotiation is a give-and-take process, and flexibility can help close the deal.
  • Consider the buyer's perspective and find common ground to create win-win scenarios.

• Understand Earnouts vs Seller Financing:
  • Earnouts: If you structure part of the sale price as an earnout, this means that the deal is contingent on the business’s future performance. This can bridge valuation gaps and align interests. We will talk more about this in future posts.
  • Seller Financing: If you offer seller financing, where you extend credit to the buyer, you can make your business more attractive. This demonstrates confidence in the business’s viability and can facilitate the sale. We will also be proving more information about this in the near future!
• Are you being asked to sign a Non-Compete Agreement?
  • Buyers may require you to sign a non-compete agreement to prevent you from starting a competing business after the sale.
  • If this is the case, it is best practice to negotiate reasonable terms and durations to protect your interests while satisfying the buyer’s concerns.
• Keeping Employee Retention in Mind:
  • Discuss the fate of your employees with potential buyers. Negotiate terms that protect their interests, such as job security, benefits, and retention bonuses.
  • Highlight the value of your team to the buyer, emphasizing their role in the business’s success and continuity.

Use Professional Help:

• A Lawyer:
  • Engage a lawyer to draft and review the purchase agreement. They ensure that the terms are legally sound and protect your interests.
  • Your lawyer can also help negotiate legal clauses, such as indemnity provisions, non-compete agreements, and contingencies.
• An Accountant:
  • Work with your accountant to understand the tax implications of the sale. They can help structure the deal in a tax-efficient manner.
  • Your accountant can also assist in financial due diligence, ensuring that the buyer’s financial representations are accurate and reliable.
• A Business Broker:
  • Seek advice from your business broker to navigate the negotiation process effectively. Brokers bring industry expertise, market knowledge, and negotiation skills to the table.
  • Your broker can also act as an intermediary, facilitating communication and resolving disputes between you and the buyer.
  • Interested in connecting with a qualified business broker? We can help.

By approaching negotiations strategically and leveraging professional help, you can achieve a favorable outcome that meets your financial goals and ensures a smooth transition for your business.

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Step 9: Determine if Seller Financing is Right for You

Seller financing can be an effective option to facilitate the sale of your business. By extending credit to the buyer, you can make your business more attractive and accessible to possible buyers who might not have immediate access to full funding.

What is Seller Financing?

In seller financing, the seller allows the buyer to pay the purchase price in installments over a specified period, rather than paying the full amount upfront.

The seller essentially acts as a lender, with the buyer making regular payments that include principal and interest until the full amount is paid off.

Benefits of Seller Financing for the Seller

• Attract More Buyers:
  • Offering seller financing can expand the pool of potential buyers, including those who may not qualify for traditional bank loans.
  • It demonstrates your confidence in the business’s continued success under new ownership.

• Potential for Higher Selling Price:
  • Since you’re providing flexible financing terms, you might be able to negotiate a higher overall selling price.
  • Buyers may be willing to pay a premium for the convenience and flexibility of seller financing.

• Income Stream:
  • Seller financing creates a steady stream of income from the interest payments made by the buyer.
  • This can be beneficial for sellers who prefer ongoing income rather than a lump-sum payment.

• Tax Benefits:
  • Spreading out payments over several years can provide tax advantages, potentially reducing the immediate tax burden associated with a lump-sum sale.

When to Leverage Seller Financing:

• Buyer Financial Capability:
  • When the buyer has a solid business plan and demonstrates the ability to generate sufficient cash flow to meet the payment terms.
  • It's essential to assess the buyer’s creditworthiness and financial stability to mitigate risks.
• Market Conditions:
  • In a buyer’s market where traditional financing options are limited, offering seller financing can make your business more competitive and appealing.
  • If your industry is experiencing growth, seller financing can attract buyers looking to capitalize on emerging opportunities.
• Transition Period:
  • If you want to ensure a smooth transition, seller financing allows you to stay involved in the business during the repayment period, providing guidance and support to the new owner.

Structuring Seller Financing:

• Terms and Interest Rates:
  • Clearly define the payment terms, including the interest rate, repayment schedule, and duration of the financing.
  • Ensure the interest rate is competitive but also compensates for the risk you’re taking as the lender.
• Down Payment:
  • Require a substantial down payment to ensure the buyer has a significant investment in the business from the start.
  • This reduces your risk and demonstrates the buyer’s commitment.
• Legal Documentation:
  • Work with a lawyer to draft a comprehensive financing agreement that outlines all terms and conditions.
  • Include provisions for default, collateral, and any necessary protections to safeguard your interests.
• Due Diligence:
  • Conduct thorough due diligence on the buyer, including credit checks, financial reviews, and reference checks.
  • This ensures that the buyer is capable of meeting the financial obligations of the seller financing agreement.

By leveraging seller financing, you could potentially facilitate a smoother and more attractive sale process, making it easier for buyers to acquire your business while securing your financial interests.

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Step 10: Close the Deal

The final step is closing the deal, which involves formalizing the transfer of ownership.

Finalizing the Transaction:

• Review All Documents: Before the closing meeting, review all documents with your lawyer and financial advisor.
• Signing Ceremony: This typically involves a signing ceremony where all parties come together to sign the final documents.
• Transfer of Payment: This is when the transfer of funds will be made to you, the seller. Ensure that the payment is documented and receipts are issued.
• Record the Transaction: Legally record the transaction to signify the change in ownership. This might involve updating business licenses, registrations, and titles.
• Notify Stakeholders: Inform all relevant stakeholders, including suppliers, creditors, and business partners, about the change in ownership to ensure continuous operations.

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