Getting Ready to Sell Your Business
You’ve thought long and hard about your decision to sell your business. You’ve selected the best timeframe for your needs, started early, and made all the preparations to get your business ready for sale. Now it’s time to put your plan to sell your business into action.
Just as you didn’t leave building your business to chance, you don’t want to cast your fate to the wind when it’s time to sell, either. Putting a process into place before your business hits the open market will help you attract the best opportunities, get the sale price you want, and protect your confidentiality.
In this article, we’ll walk you through the issues to address and the processes to put into place to help get maximum value for your business and make sure the sale goes off without a hitch.
What Are You Selling?
Before you can put your business on the market, you’ll need to get clear on exactly what it is you’re selling.
Business acquisitions are typically structured in one of two ways—asset sales or established business (also referred to as ongoing concern) sales. Asset sales involve the sale of a company’s assets such as furniture, real estate, or equipment (usually to a buyer who needs some or all of the assets for a different company), whereas established business sales involve the sale of the whole company, usually to a buyer who intends to continue to run it.
If your business shows genuine prospects, you’ll likely have no trouble finding a buyer who will want to own and run it.
But if your business doesn’t measure up (more on that below), it’s best to cut your losses early, and opt for an asset sale so that you can recoup at least some of your investment.
Pricing and marketing will be different for an asset sale versus a company sale, so it’s important to set clear expectations about what you’ll be selling at the outset.
(If you're not sure what you should be selling, you may want to read Is Your Business is Worth Selling?)
Get a Business Valuation
You’ll want to begin the process of selling your business with a realistic idea of how much money your company will fetch.
Companies are typically valued for sale using what’s called a multiple of sales, earnings, or another performance metric.
Small businesses often use seller’s discretionary earnings (SDE) as their performance metric. SDE is the profit a company generates after discretionary expenses (those that a new buyer wouldn’t be required to spend) are added back to the bottom line.
Let’s say your business is in an industry where the multiple is 2, and your SDE is $1 million. Your business would be valued at 2 times $1 million or $2 million.
Calculating your SDE will help to show whether to conduct an established business sale or an asset sale. If your SDE shows a deficit, or the thinnest of profits, an asset sale might be the best course of action.
If you are conducting an asset sale, you’ll need to take inventory of your assets and price each individually. The market will determine whether you’ll be able to find a single buyer for all the assets you want to sell or whether you’ll need to identify different buyers for different assets.
(For an introduction to business valuation, see How to Value a Business For Sale.)
Decide Whether To Use a Business Broker
Business brokers specialize in selling businesses for a commission that typically ranges from 10% to 15% of the sale price. Some also charge an upfront fee that might be credited back to the commission charged when the sale is complete.
Unless you have a buyer, such as a family member, already earmarked; you might find it’s worth the cost to hire a business broker. They bring a lot of value to the transaction beyond negotiating the sale.
Business brokers generally have access to more resources, such as a national database on comparable sales and contacts with potential buyers. They can value your business objectively and help ensure that you aren’t overpricing it or leaving money on the table. A business broker will qualify prospective buyers, so you’re not spinning your wheels on prospects that won’t be able to close the transaction. With experience in marketing businesses and structuring transactions, they also assist with preparing documents.
There’s no rule that says you can’t manage the sale of your business yourself. Sellers who choose to go it alone are called FSBO (for sale by owner) sellers.
Selling a business can be time-consuming. Before deciding to conduct a FSBO sale, consider whether managing the process will take time and attention away from running your business, and whether you have the expertise you’ll need.
If you decide to go it alone, bizbuysell.com can offer resources from how-to articles to comparative sale prices for similar businesses.
(To read more about making this decision, see Selling Your Business Without a Broker.)
How Much Information Should You Make Public?
A business broker can reach out to potential buyers discreetly and share only enough information to attract their interest and persuade them to explore the acquisition further.
If you are using a listing service such as BizBuySell, you’ll have to decide how much information you’re willing to post on a site that’s available to many, including your competitors.
The more proprietary sales and earnings information you offer, the more likely you are to attract buyers, but you’ll also be exposing your company’s financials to looky-loos and those who don’t have a serious interest in buying your business.
There’s no easy answer to this dilemma, especially because many potential buyers use filters to search listing services, and omitting key financial data means that your business listing might not show up on some searches.
Consider all the pros and cons before you decide whether to include or omit data like company revenues, EBITDA, or the value of your furniture, fixtures, and equipment (FF&E).
(For tips on marketing your sale discreetly, see Selling Your Business Confidentially.)
Create a Selling Memorandum
You’ll need a selling memorandum, sometimes called a confidential information memorandum (CIM) or confidential business review, to market your business for sale.
Only serious buyers will see a selling memorandum because it includes a wealth of proprietary information about your business operations and performance. When well-written, it can be an invaluable resource for pitching your company to buyers because it shows not just the current state of your business but your future prospects as well.
Prepare a Non-disclosure Agreement (NDA)
A non-disclosure agreement (NDA) is a legally enforceable document that protects your ideas and information from being stolen by competitors or other third parties. It provides legal penalties including fines and even criminal charges if someone shares the information covered in the NDA with anyone not authorized to have it.
Before you share your customer database, proprietary product information, intellectual property, or any other information that’s central to your business success with a prospective buyer, you’ll want to have a signed NDA in place.
You can ask an attorney to draft an NDA or write one using many templates you’ll find online. If you’re preparing the NDA without an attorney, it’s a good idea to hire one for the sole purpose of reviewing it to make sure that it covers exactly the areas you want to protect.
Whether you’re selling your business on the open market, to a trusted family member, or to another business owner, you’ll want to put a process into place that attracts the best opportunities. Check out the BizBuySell Seller’s Learning Center to learn all you need to know about exit planning.