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How to Sell Your Small Business

people shaking hands over business graphs
November 13 2020 • by Marissa Scott • Business, Retirement

Making the choice to sell your small business could be a difficult and personal decision. Some of the most common reasons people decide to sell include retirement, illness, disagreement with a business partner, or shifting to a new career. Whatever the reason, it can be an overwhelming task to manage. Knowing what steps to take in advance can provide some peace of mind when facing the process.

One of the first questions potential buyers may want you to address is why the business is for sale. If you have recently decided to put your small business on the market, take the time to craft how you will answer this question. If your answer is simply because the business is not profitable, it could be a hard sell to a new owner. Consider new avenues and opportunities the business could take in the future. 

Have an Exit Strategy 

A successful transfer of ownership won’t happen overnight. The process of listing a business for sale and finding the right buyer can take at least a year if not longer. Transitioning to new ownership will be simplified if you plan your exit strategy as far in advance as possible. If you feel that one or more of your current employees would do a good job running your small business after you step aside, consider proposing the idea before you list your company for sale. You could also look to hire someone in advance with the intent that they will eventually take over the business, whether that is within months or years.  Other options might include:

   •    Pass the business to a family member
   •    Merger or acquisition
   •    Have current business partners buy you out
   •    Take your business public 
   •    Liquidate the business 

In any situation, preparing for the sale ahead of time allows you to gather the documents you need, notify your customer base of the change in leadership, and improve company finances before turning over the reins to a new owner.

Business Valuation

Before you can list your small business for sale, you will need to work with a business appraiser to obtain its value. Not only will an appraiser assign a financial value to your company, they will also review the competitive landscape in your industry and geographical location. These are just some of the factors a business appraiser considers during the valuation process:

   •    Inventory
   •    Assets
   •    Outstanding debt
   •    Receivables
   •    Sales

The purpose of the valuation process is to determine specific opportunities and threats facing your company. This information helps the appraiser to arrive at an accurate value. Small businesses typically sell for at least three times their yearly cash flow. However, keep in mind this is only an estimate and your valuation may come out higher or lower. Your appraiser will provide a detailed explanation of the value they determine, which can then be used to set a listing price. 

Decide if You Want to Use a Broker

Selling your company takes considerable time and effort. You may not have either to spare if you’re still actively managing the business. For a commission that typically ranges between 5 and 10 percent of the final sales price, a business broker will access a large network of potential business buyers and list your small business for sale in appropriate marketplaces. A business broker could also complete the valuation process to save you from having to hire two separate professionals. Business brokers are motivated to get the highest selling price since they earn higher a commission and satisfy the customer.

Get Documents in Order

Creating a snapshot of your business to show potential buyers could help the sale. You will need to provide all financial statements and tax returns for at least three years prior. An accountant should review these to verify they are correct. You should also construct a list of any assets that will be included in the purchase such as equipment or remaining inventory. Other documents you will need to compile for the sale may include:

   •    Contact list for suppliers 
   •    Current lease
   •    Employee paperwork
   •    List of website domains
   •    Non-compete agreements if applicable
   •    Operating manual for the new owner to complete daily transactions
   •    Purchase agreement
   •    Sales contract

You should already have many of these documents except for those completed by the buyer at the time of the sale.

Ask Your Buyer to be Pre-Qualified

Most people buying a small business require financing and choose to work with a lender with backing from the Small Business Administration. Lenders view loans backed by the SBA as less risky since the government organization guarantees payment up to a set percentage if the borrower defaults on the loan. However, your buyer still may not be able to secure funding to complete the transaction according to your timeline. Asking buyers to obtain pre-qualification from their lender allows you to avoid the frustration of seeing a deal fall apart. 

Once you and the buyer have negotiated a selling price, be sure to get your agreement in writing. To protect your personal data and that of your employees, the buyer should sign a confidentiality or non-disclosure agreement at the same time. 

According to Service Corps of Retired Executives (SCORE), a business sale could take six months to two years. Finding the right buyer could be a challenging, and personal, process. It can be difficult to put your trust in someone new after building up your business. If you're interested in selling your small business, or have a buyer that needs to secure financing to purchase your business, contact our experienced team of business lenders.