Whether you are planning to retire or focus on other opportunities, selling your business is an excellent way to exit and raise money from the business you have successfully built. This guide will provide an overview of the main stages of the process, along with additional resources and tools at each step.
It may sound obvious, but many business owners fail to prepare the business to continue operating in their absence. Your goal is to get your business into selling shape, which means organizing your financial records, documenting important operating procedures and contracts, and delegating critical functions to employees.
One of the main issues business owners struggle with when selling is separating themselves from the business. If you're working 60 hours a week to keep the business running, it's going to be very difficult to find a buyer willing to pay a premium to "buy your job". Business buyers are looking to purchase a reliable income stream that requires a minimum of management. The challenge during exit planning is to delegate as much of your workload to employees, so that you only focus on the larger business strategy.
If you don't have the employee bandwidth to delegate your work, it may be necessary to hire in some management or administrative personnel to get the job done. Additionally, now is a great time to look at the work that you do, and find opportunities to automate, streamline, or otherwise reduce your workload.
Ideally, you've been showing business profits on your tax returns for several years, and you have the financial documents to back them up. Most small business owners minimize their tax burden by leveraging deductions and expenses that lower net income. This is great for business owners, but makes it appear less valuable when selling.
Make sure to lean on your accountant to help show the full financial benefit the business creates for you. This can be accomplished through a statement of seller's discretionary earnings, which recasts your business earnings and "adds back" those expenses you used to minimize taxes.
You will want at least three years of organized financial documents, including income statements, balance sheets, and tax records. Buyers will evaluate your business primarily on its financial performance, so make sure your records are clean and accurate – you will need them to justify your asking price.
For more on preparing to sell, see Exit Planning for Business Owners: An Overview.
How much is your business worth? Like most asset sales, the ultimate answer is whatever someone is willing to pay for it. As a business owner, you need to evaluate your business in the same way buyers in the market do – as an investment with some expected returns.
To get an idea of your business's value – and an appropriate asking price – you will need to compare your business to others that have sold to get an idea of how much buyers are willing to pay given your business' unique financial performance and growth prospects. (If you haven't already created a BizBuySell account, now is the time to do so. You will want to set up alerts so that you can keep track of businesses for sale in your market as they become listed.)
Like real estate is valued by dollars per square foot in a given market, businesses are valued by dollars per expected annual earnings. More accurately, private business acquisition values hinge on a multiple of earnings. The national average earnings multiple is around 2.5, meaning the average business value is around 2.5 times its owners' annual discretionary earnings. So, a small business generating seller's discretionary earnings of $200,000 may be valued around $500,000 ($200,000 x 2.5).
Also like real estate, valuation multiples vary by market, and especially by industry and business type. For example, the average restaurant sells for around two times its earnings, while the average brewery will fetch almost four times its annual earnings. To get an idea of how different types of businesses are valued, see our tables of valuation multiples by industry.
While market multiples will often be the crux of a business valuation, it's not the only method for pricing a business, and there are numerous other factors that contribute to the value of a business. Is the business growing or shrinking? What about its industry? Does it have a great location? Does it have any competitive advantages? A market value calculation is a good starting point, but the asking price should be increased or reduced based on how the business stacks up against its peers.
For a deeper dive into valuation, start with our guide on valuing a business for sale.
Marketing your business for sale involves seemingly contradictory goals. You want to make as many potential buyers aware of your business for sale listing while also keeping the identity of your business confidential. As a rule, business sales are conducted in confidentiality to prevent employees or customers from getting spooked and looking for alternatives. You don't want to make waves that may affect the performance of your company at this crucial stage. That's why most business owners and business brokers will use blind listings which provide general information about the business, its rough location, high level financials, and an asking price, without disclosing its identity.
In addition to listing your business for sale on a large marketplace, you may want to reach out to trusted advisors, business associates, and even competitors to let them know you're considering selling. It's possible that the most appropriate buyer for your business is another business that complements – or competes against – your own. Again, try to limit this information to professionals you can trust to keep your intentions close to the vest.
Most business sellers will recruit an experienced broker to help with the sale, and they will be a great resource to help get your business in front of qualified buyers. They will also be the first point of contact with interested parties. Brokers vet each prospect before executing a non-disclosure agreement and passing on the details of your business and its financial documents.
An effective marketing strategy will generate interest from as broad a range of potential buyers as possible, and ideally result in more than one offer to purchase. This way you have the best chance of negotiating a sale at a suitable price and the right terms.
For an introduction to marketing your sale, start with our article, How to Find Buyers for Your Business.
After successfully identifying buyers and getting at least one offer, it's time to work out the details. Price is always going to be the main point of negotiation, but the terms of the deal are equally important, and give you levers to reach your goals while meeting the buyers' requirements.
Some of the key terms to consider will be:
For a great list of terms you can leverage to get the deal you want, see Bridging the Price Gap: Negotiation Tactics for Small Business Transactions.
You've pinned down the selling price and terms, and now the buyer is going through your financials and legal documents in the due diligence process. This is the point at which your lawyer and accountant really earn their paychecks. Your accountant should be able to respond to any requests for information or clarification, and your attorney will be preparing and reviewing final closing documents.
It's not uncommon for discrepancies to arise between information that was presented during negotiations and what's found in the due diligence documents or the buyers external sources of information. Small disparities are not typically a problem, unless they reveal some intentional misinformation. Although, if the financials are sufficiently different from what was previously reported, it may be necessary to adjust the price or terms to account for it.
Once the buyer has reviewed the documents, and everything is on the up and up, the last step is to prepare and attend the closing meeting. Here, you and your attorney will sign the final documents, transferring ownership of your business to its new owner.
For more on the due diligence process, see Due Diligence: A Checklist for Selling Your Business.
To get an idea of the documents involved in closing, see Closing the Sale of a Business: Securing the Deal.
Download our free Guide to Selling your Business and get information and advice to sell your small business successfully and with confidence.
