Have you thought about selling your business to reap the benefits of all your hard work? The good news is that the acquisition of small businesses is on the rise. According to a report by BizBuySell, “Volume of small business acquisitions moved up 4.8% in the first quarter of 2023 over Q4 of 2022 and after three consecutive quarterly declines.” The recent increase in business sales can give you confidence that buyers are looking to make a purchase, even during the current economic uncertainty.

While the statistics reflect that buyers are currently searching the market, selling a business is a complex process that requires much planning and preparation. There are many factors to consider, such as when to sell, how to find buyers, and how to maximize the sale price. This is why it’s essential to take the time to understand the process and gain a comprehensive understanding of how to sell your small business.

If you’re ready to sell your small business, here are some key steps to take to find the right buyer:

Have a Clear Understanding of Your Goals

The first step to selling your business is to ensure you have a clear understanding of your goals. First, why are you looking to sell the business? Buyers will commonly ask this question to understand your reasons for exiting—and make sure there’s not a hidden reason not to buy your business. Are you looking to make a quick sale, or do you want to maximize your return? Do you want to maintain some control over the business, or do you want to be completely hands-off? You should also consider your timeline and whether you’re willing to wait for the right offer.

Develop an Exit Strategy

Once you have established your goals, you should develop an exit strategy. This should include a timeline for when you plan to put the business on the market, the steps that need to be taken to prepare the business for sale, and the methods you will use to find buyers. Your exit strategy should also include a plan to handle any potential issues that may arise during the sale process.

Having a clear exit strategy in place is important to help you mentally prepare for the sale of your business and to possibly limit any losses. Lastly, an exit strategy should also include your plan to offboard from your company. Some owners have a hard time letting go of control, and this should be accounted for in your future with the company. Will you stay on in some form to help with the transition or as a consultant? Will you retain some share of the company? Or will you be fully exiting? According to HubSpot, you may have a plethora of options for life after exiting, including:

• Annuity in perpetuity: a profit share for the life of the business
• Retaining ownership of a brick-and-mortar building to create a future rent stream
• Taking a revenue share for any new clients brought into the company
• Selling your business on a partial installment basis to spread out the payments (which can help with tax deductions)
• Staying on as an employee (often called an acqua-hire)
• Stay with the business as a consultant

Take an Inventory of Your Business

Before you can put your business on the market, you must be certain it’s in the best possible condition. This includes evaluating the business’s financial health, organizing all relevant documents and bookkeeping, and ensuring operations are running smoothly. It would be best to look for areas where you can improve efficiency or reduce costs. Taking the time to prepare the business for sale will help to appeal to qualified buyers, maximize the sale price, make the process of selling your business smoother and more manageable, and ease your transition out.

Have a Valuation Done

To determine the value of your business, you should have a professional valuation done by a qualified business valuator. A valuation will provide you with an accurate and realistic assessment of the worth of your business. According to Business.com, when evaluating your business, “The two most common are the multiples method and the discounted cash flow (DCF) method.”

• Multiples Method – assumes similar firms sell for similar prices. Take a recently sold company in your industry, and divide its sales price by its total sales, EBIT (earnings before interest and taxes), or EBITDA (earnings before interest, taxes, depreciation, and amortization) to get a multiple. Then, multiply the multiple by your company’s sales, EBIT, or EBITDA to arrive at a valuation.
• DCF Method – focuses on projected cash flow, calculating the present value of three years’ cash flow using the formula:
  Value = Cash flow year 1 + Cash flow year 2 + Cash flow year 3 / (1+ discount rate) (1+ discount rate)² (1+ discount rate)³, with the present value being compared to the investment amount to determine if it’s a good investment

Of course, there are other valuation methods, but the multiple and DCF methods are the most common ones. A proper valuation can help you set a fair sale price and negotiate better terms with potential buyers.

Choose the Right Method to Sell Your Business

When it comes to selling your business, you have a few options. You can sell directly to a buyer, list your business with a broker, or use an online marketplace. Each method has advantages and disadvantages, so it’s imperative to understand each option and choose the one that best meets your needs.

Do note that if you go with a broker, you may have to pay a percentage of the sale price. According to Business News Daily, depending on the size of the business and the revenue it brings, the commission is as follow:

• Companies with $1 million in revenue can expect to pay a 12% to 15% brokerage fee.
• Those with revenue between $1 million to $5 million can expect fees of 8% to 10%.
• For businesses with over $25 million in revenue, commission fees can be 5% to 7%.
• Companies with $50 million or more in revenue can anticipate fees of 4% to 6%.

Ultimately, the method you use to sell your business will be determined by your goals and how fast you want to get your business into someone else’s hands.

Market Your Business

Once you have chosen a selling method, you need to start marketing your business to potential buyers. This can include advertising in industry publications, using social media, and attending relevant events. You should also use any contacts you may have in the industry to get the word out about your business. Per Forbes, if you have a broker, they “will undertake the marketing and advertising on your behalf, communicating salient information about the business to prospective buyers including lease, assets, stock levels, financial and sales data and staff details.”

Whether you have a broker helping you market your business or whether you’re doing it yourself, it’s important to showcase your company in the best light to attract interest and help you find suitable buyers.

Negotiate the Sale

After finding a buyer, it’s time to negotiate the sale. You should be prepared to negotiate on price, terms, and other issues. A reputable business sales lawyer can help you successfully arrange the terms of sale for your business. However, you should thoroughly vet whoever you’re hiring and ensure they have your best interests in mind.

According to Business News Daily, the following documents may be needed during the sale of your business:

• Purchase agreements – a purchase agreement is a contract between a seller and buyer that outlines the terms and conditions of a transaction. It usually includes the price, payment terms, delivery terms, and any warranties associated with the purchase.
• Bill of sale – a bill of sale is a document that transfers the ownership of goods from one party to another. It provides evidence of the transfer of goods and serves as a receipt for both the buyer and seller.
• Reps and warranties – this includes promises made by the seller to the buyer in a purchase agreement. These promises typically relate to the condition of the goods or services being sold and the seller’s responsibility to ensure they are of a certain quality.
• Indemnification clauses – provisions in a contract that require one party to reimburse the other for any losses that may result from a breach of the contract. They protect one party from liability for damages caused by the other party’s negligence or misconduct.
• Asset list and transfer – a document that outlines the assets that are being sold or transferred from one party to another. It typically includes information about the assets, such as their description, value, and condition.
• Noncompete clauses and agreements – these agreements prevent one party from competing with the other party in a certain market or geographic area. They are used to protect one party’s intellectual property and limit the potential for competition.
• Intellectual property transfer – this highlights the process of transferring ownership of intangible assets, such as copyrights, patents, trademarks, and trade secrets, from one party to another. It usually involves a written agreement that outlines the terms of the transfer.
• Transition time and work agreements – documents that outline the terms and conditions of a transition period during which one party is transitioning to a new job or position. It typically includes information about the transition timeline, job duties, and other relevant details.
• Employment agreements and employee continuity – documents that are used to ensure that the employees of one party maintain their employment after the sale or transfer of a business. It typically includes information about the employee’s job duties, compensation, and any benefits they may receive.
• Escrow of the sale monies, transfer, and closing – a process in which a third party holds the purchase money in escrow until the sale is complete. This ensures that the buyer’s funds are protected, and the seller receives the full purchase price.

Close the Deal

When negotiations are complete, it’s time to close the deal. This process includes signing all necessary documents and transferring ownership. You should also ensure the buyer has all the information they need to operate the business successfully.

Handling the Profits

No matter what you walk away with after selling your business, you’ll need to have a plan for taxes and the remaining proceeds. What are your overall financial goals? How do the sale proceeds correlate with your reason for selling in the first place? Speaking with a financial professional can help you understand the tax implications from the sale and give you options for paying down debt, saving for retirement, or investing in other forms.

Congrats – you’ve done it! You’ve successfully sold your business. By preparing your business for sale, clearly understanding your goals, and following the steps outlined above, you can help maximize the sale price and find the right buyer.

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This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated. The information contained within is believed to be from reliable sources. However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals.

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References

Bharucha, Vishal. (April 6, 2022). Five Tips To Successfully Sell Your Business. Forbes. https://www.forbes.com/sites/theyec/2022/04/06/five-tips-to-successfully-sell-your-business/?sh=7ca72f952e50

Biz Buy Sell. (n.d). BizBuySell Insight Report. Business for Sale Market Rebounds in Q1 2023 After Year-End Declines Amid Rate Hikes and Inflation. https://www.bizbuysell.com/insight-report/

Chapman, Alex, (March 14, 2023). 5 Crucial Steps to Sell Your Business. BND. https://www.businessnewsdaily.com/how-to-sell-your-business

Friedman, Sara. (August 24, 2022). How To Sell Your Business and Make a Successful Exit. HubSpot. https://blog.hubspot.com/the-hustle/sell-your-business

Smith, Russell. (February 21, 20230. 4 Simple Steps to Valuing Your Small Business. b. https://www.business.com/articles/four-simple-steps-to-valuing-your-small-business/