How to Sell a Business: The Ultimate Guide (2021)

  • by Brandon Boushy
  • 3 months ago
  • Learn
  • 1
Men making a business deal

Are you considering selling a business, but need help figuring out the process? This definitive guide to selling a business will demystify the process. Keep reading to get the most value for your business.

Every business owner will eventually decide it is time to develop an exit strategy.

Whether you are selling a business to start a new one, retiring, or just passing it on to your kids, our guide will give you the steps to prepare for a sale including:

  1. Define the exit strategy
  2. Prepare financial statements
  3. Get an independent business valuation
  4. Increase the business value of your small business
  5. Market to potential buyers
  6. Negotiate terms and sell your business
  7. Transition period

Our video on getting seed funding provides a lot of tips that also apply to selling a business.

There will be a ton of information in this guide, so make sure to download our Selling a Business Checklist to help you in the process. Keep reading for information on how to sell your business.

Step 1: Define the Exit Strategy

The first step in selling your business is defining your exit strategy. There are a variety of exit strategies that a business owner can use to sell a small business.

Which strategy is right for you will depend on a variety of factors. The most important considerations are:

  • Type of business
  • Business structure
  • Working with a broker vs. without a broker
  • Who will take control of the business after I sell my business?

After reading this section, you should know what is the best way to sell your small business.

Type of Business

Selling your small business is going to vary based on the industry the business is in. For instance, many locations have specific requirements for certain industries that may limit the prospective buyers available.

I’m sure you already know the regulations for your area, but if you need to refresh yourself on any limiting restrictions for your location and industry, the Small Business Administration is a good place to start.

This information will help when you start to market to prospective buyers.

The payment processor ShopKeep has a blog on the most profitable small businesses in 2021 that you should check out to see if your industry is on the list.

Franchises may have special requirements that owners must go through to sell their franchise. Talk to your franchisor for more information on making a deal to sell a franchise.

Business Structure

Three cubes with the letters LLC
When wondering “How do I legally sell my business,” thinking about the structure is important because it will impact the process of selling a business. Owners typically start a company with one of four structures:

  • Sole Proprietorship
  • LLC
  • Partnership
  • Corporation
  • Comparison of business structures (need to remake chart)

Depending on how the business is structured, selling it will follow a different process. An LLC and Corporation are the easiest to transfer ownership as they are intended to be separate entities from the business owners, while a sole proprietorship is the hardest to transfer ownership as it is meant to have a single owner and the income and liabilities are tied to the person.

When you think about how to sell a small business that is a sole proprietorship remember you will be selling the assets, but the new business owner will have to reorganize the business under their name.

Alternatively, you can change it to an LLC before the sale to make the transfer easier. To set up an LLC check out this Small Business Trends article.

Other than those variances, the only real differences are the tax and legal documents, which you can find information on at the IRS website.

Broker Sales or Private Sales

There are two main ways to sell your business, brokers or private sales. Let’s explore each to establish whether your small business will benefit from a broker selling it or whether you should learn how to sell a business privately.

Selling Your Small Business with a Broker

Entrepreneurs cosnsulting a business broker
Selling your business with a broker will normally be easier because they do most of the harder work.

They have been through the process multiple times and are able to help guide you in getting the proper financial statements and due diligence, determining an asking price, finding potential buyers,  finding the right buyer to sell your business to, and closing the deal.

If you want to sell your business with a broker, you’ll need to reach out to one. We have some that you can talk to listed here or you can search for “business brokers near me” in Google to find a business broker in your location.

Brokers will normally charge a percentage with a minimum commission that varies based on the revenue of the company being sold.

MidStreet Mergers & Acquisitions has an easy-to-understand blog of how brokers normally charge if you want to understand “how much does it cost to sell a business?”

Given the minimum commission is typically $10-12k, if your business makes less than $100k revenue per year, you will probably want to understand how to sell a business without a broker.

How Do I Sell My Business Without a Broker?

A small business for sale by an owner may result in keeping more of the business valuation once the business is sold, but unless you already have someone in mind it may not be the best way when trying to figure out how to sell a business quickly.

You’ll be responsible for gathering all the company financial statements, determining the asking price, finding potential buyers, answering all their questions, getting the best deal, and finding someone to review the closing documents before selling.

Make sure to consider the time and financial costs that will be incurred when deciding how to sell your business.

If you are trying to improve cash flow, profit, or revenue while looking for prospective new owners, you may find that it is hard work if trying to sell quickly.

If you have time to do it right and make sure to do your due diligence, you can potentially get a higher sales price and keep more of the profit. We specialize in this, so make sure to sign up to sell a listing.

Who Will Take Control After Selling Your Business?

A pen a question mark on a desk
Many of the steps I would consider when thinking about how to sell my business would be impacted by whether I have a specific buyer in mind.

There are some specific instances where getting the best value may not require all these steps. Some scenarios that may simplify the process include:

  • Employee Buyouts.
  • Plan to sell to a related person upon retirement.
  • A competitor approaches you about merging the businesses.

These scenarios could limit many of the questions that need to be considered in steps 3, 4, and 6.

In the case of merging two businesses, there are some additional considerations that are discussed in our blog Increasing Business Value through Mergers which will go into far greater detail about how to sell your business to a competitor.

Step 2: Prepare Company Financial Statements

Potential buyers are going to want to see the long-term value of the company as demonstrated through revenue, cash flow, and profit.

This information needs to be readily available because it will impact all the other steps going forward.

You should make sure to include the following documents

  • Tax returns for last 7 years (or the start of business)
  • Supplier agreements
  • Business licenses and insurance documents
  • Proof of intellectual property rights/ownership
  • Documentation of all debts and liabilities
  • Documentation of all assets
  • Anything else you think the buyer might want to know

The long-term sales growth, net working capital, and other financial information will help brokers and agents answer buyer financial questions while selling the business for the most money.

Step 3: Get an Independent Business Valuation

Pens and a notebook on a desk with the word value
Because many owners have been heavily invested in their business for years, I would recommend getting an independent company to review your financial records to make sure you have an unbiased view of how much your company is worth before determining the price you want for selling your business to potential buyers.

Regardless of whether you get a suggested sale price from someone who evaluates businesses, there are several ways of establishing worth you should be familiar with.

Valuations Formulas to Know Before You Sell Your Business

There are multiple ways to value a business for sale which I discuss in the blog How to Buy a Business. The following is a recap of it adjusted for sellers.

When determining how to value a business to sell the following methods can be beneficial to evaluating the value:

  1. Asset Valuation
  2. Price to Sales Ratio
  3. P/E Ratio
  4. Discounted Cash Flow

Asset Valuation Model

An asset Valuation Model is used in businesses that are heavily based on assets. When selling a shopping center, this is a great model. It basically adds up all equipment, inventory, and property then subtracts liabilities and debts.

In the example above, the company would be valued at $1,516,020. This process doesn’t take into consideration revenue or market direction so it might not be the most fair way to value the true worth.

Price to Sales Ratio

Another way of valuing a business is by the price to sales (P/S) ratio. This takes the revenue of a company and decides how much to value it based on industry standards. Check out NYU Stern’s site for an idea of what multiple to use.

Using this method the P/S ratio ranges from .21 for grocery stores to 14.85 for software companies, with a total market average of 2.64-2.66.

If you compare this process to the asset valuation model, you’ll find that the revenue would only have to be around $570, 000 to justify the same sale price.

Price to Earnings Ratio

To use the price to earnings (P/E) ratio, you use the net income and industry norms. NYU Stern has a similar table for P/E Ratios.

Let’s assume that your company is a retailer, based on the NYU Stern charts, the net income would only have to be between $58,000-67,000 to be worth the same as the previous models.

Discounted Cashflow Method

Man showing cashflow result
The discounted cash flow method is a more extensive process, but it is a more accurate option to make sure you use due diligence.

This one allows you to include a variety of factors that other methods might not. Investopedia wrote an article that will help you get a deeper understanding of this step. You can read it here.

Factors taken into consideration in this method include:

  1. Sales and growth
  2. Cost of capital (inflation assumption of 3% plus the interest rate on a loan)
  3. Income taxes
  4. Changes in inventory, accounts payable and accounts receivable
  5. Investment income
  6. Depreciation

Zions Bank offers a useful calculator for the discounted cash flow method.

It will help you test a variety of different market conditions and is a really good option to help you find how to value a small business.

Make sure to do your due diligence by documenting each scenario you test. This will help you negotiate when selling your business to potential buyers.

Check out our blog about How to Value a Business for more information on valuation methods.

Step 4: Increase Business Value Before Sale

Businesses are valued differently by different people based on what they consider important. There are several things you can do to increase the potential sale price  before approaching potential buyers, including:

  • Tidying up
  • Documenting plan going forward like you aren’t selling
  • Improve financial positions and profit margin.
  • Pay attention to the market

We have a video series with Paul Akers if you’d like to learn more about making a business run more efficiently.

Let’s dig deeper into why each of these is important.

Tidying Up

In the normal process of the workday, it’s common for everyone to have more work than time. If you make the time to get the space where every person who walks in can tell what and where everything is it will take them less time to make a more favorable impression of the business.

It will get you prepared to give buyers the best idea of how to keep the store organized. It will be worth it because you’ll know where everything is and be more prepared to answer questions about any of the topics related to the operations.

Documenting Plan Going Forward Like You Aren’t Selling

This step shows that you have thought about the long-term success of the business and shows that even though you are considering selling, you want to help the buyers succeed.

Given you have the best knowledge about how well the business is doing, what opportunities you haven’t capitalized on, and what you just haven’t gotten around to, it will give both you and the potential buyer a map of what step should be focused on next.

A documented plan may increase the valuation from buyers if they believe it is a good plan. It will also help you with finding ways to improve the valuation to get the best offers from buyers.

Improve Financial Positions and Profit Margins

If you find that the financial position of the company can be viewed in vastly different ways, you may want to investigate how to make the different market valuations more in line with each other.

For instance, if the Price-Sales ratio shows the value is $1.5 million, but the Price-Earnings Ratio shows a valuation of $800,000, buyers are going to consider the best sale price $800,ooo leaving a lot of money on the table.

If you find a way to bring the PE ratio more in-line with the $1.5 million valuation, the sale could be worth an extra $700K.

This would require looking at aspects like unnecessary expenses, reducing (or increasing size of) orders based on what will save more money, paying down debt, having a sale on poor-selling inventory, or any other number of methodologies.

Check out our video on how to improve business efficiency to get ideas.

Pay Attention to the Market

Market conditions can dramatically impact whether buyers are willing to offer you the best deal.

During recessions, buyers will want to take advantage of the opportunity, while during expansionary times, businesses will often see premium valuations to increase the chance of making a deal.

Step 5: Market to Potential Buyers

A note and pad on a desk with the word identity prospects
There are plenty of ways to find potential buyers. When trying to figure out how to sell a small business, these are some of the most popular options:

  • Business brokers
  • Online business marketplaces, like UpFlip’s marketplace
  • Sell to a top employee
  • Sell to a competitor
  • Newspaper / online ads
  • Ask your social network
  • Commercial realtors
  • Trade associations
  • You’re franchisor if you are a franchise.
  • Add “Small business for sale near me” in the metadata of posts and images online to trigger results during searches.

The goal here is to make people aware that you are selling your business. The suggestions above basically fall into three categories:

  1. Sell to someone you know.
  2. Have a third party help you.
  3. Use digital platforms to sell the business

Sell to Someone you Know

This is typically the least complicated way as you already have a relationship and can discuss the terms without really having to do any marketing.

The major pitfall with this solution is you might agree to a lower price or even agree to let them pay you off over time. If this is not handled strictly professionally, it could create issues in the relationship.

Have a Third-Party Help You

Third parties will typically have more experience with selling businesses and may be able to create better results faster despite the additional costs that come with hiring a third party.

Business Brokers, like our agents, are ready to help and normally charge a percentage of revenue.  They have more resources to find business owners like existing relationships that may be interested.

Franchisors might also have a list of people looking to purchase franchises that will make finding the new owner easier. If you own a franchise make sure to reach out to them.

Use Digital Platforms

Different social media platforms shown on a tablet
Digital platforms like Craigslist, Facebook, LinkedIn, and ads can help reach prospective owners, but there is a lot of knowledge required to figure out how to reach your target audience.

If you are already proficient in using digital platforms for ads, you may find that they can be highly beneficial.

If you haven’t used ads before, then they can be a steep costly learning curve, but most of them have amazing tutorials that will help you figure them out.

Step 6: Negotiate Terms and Sale of Business

To prepare for this stage, I would recommend checking out our blog about 41 questions to ask when buying a business. It will help you be prepared for questions buyers have.

During negotiations with the buyer make sure to discuss the following topics:

  • Price
  • Assets
  • Liabilities
  • Financing
  • Employees
  • Period of Time You’ll Stay During transition

We’ve already discussed most of these in previous sections, but the employees and transition period should be discussed more.

Employees

The employees of the company can be both an asset and a liability. Depending on your plans for the current employees, you may need to negotiate an agreement on how to handle them.

If you plan on eliminating positions, you may want to have an agreement on how to handle layoffs or severance packages. The balance blog offers a good read on severance packages.

Period of Time to Stay on after Transition

Many business ownership transfers require a period of time where the current owner is still active in the business. This transitional period helps secure the success of the business once the new owner takes over.

Whether it is required by a lender or the purchaser certain aspects should be included:

  1. Period of time you’ll stay on
  2. Roles during transition
  3. Pay during transition

The Period of time you’ll stay on could be as little as a few weeks or multiple years depending on the complexity of the business. It should be specified in writing how long the transitional period will be.

During the transition, there should be a plan for the roles to gradually be performed by the new owner.

When my dad was hired as the CEO of a company, he explained to me that for the first 3 months he was just observing and learning how they do things. Then he gradually started implementing new processes.

I think that is a pretty good philosophy to take during a transition.

The American Institute of Architects gives some good advice on mistakes to avoid during transition planning. I’d take a read through it real quick to help minimize transition issues.

Pay during the transition should also be discussed and documented. This should be based on the time and amount of work done. It will typically be comparable to management or employee pay.

Make sure to negotiate the pay at a level where the new owner can still make a profit otherwise it could jeopardize the health of the business.

If the buyer is using financing to buy the business, they may want to include this in the purchase price so they can secure financing for it.

Once you and the buyer are in agreement on the terms, it’s time to contact a lawyer to draft the agreement before the sale is completed.

Once the contract is drafted and signed, the buyer is now the new owner and you have more money to pursue other passions.

There may be one more step that is required. Which we’ll discuss next.

Step 7: Transition Period

A clock and four cubes with the letters TIME
Depending on the agreement with the buyer, you may need to stay on for a period of one or two years to help with the transition.

Some loans require this to help protect the investment. If it’s part of the terms required, make the best of the time. It might even be fun.

As discussed above, you’ll probably be working like normal for a period of around three months, then gradually reduce your responsibilities and time working. Typically this transition will be less than a year.

Conclusion

Now you know how to sell your company. We covered the following steps:

  • Define the exit strategy
  • Prepare financial statements
  • Get an independent business valuation
  • Increase the business value of your small business
  • Market to potential buyers
  • Negotiate terms and sell your business
  • Transition period

I personally find Shark Tank and The Profit really beneficial to better understand how investors evaluate businesses. If you don’t already watch them,

I’d recommend them to gain more business awareness.

I hope this article helps you sell your business for the most value. If you need some help, reach out to UpFlip and we’ll help you sell it.

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0 thoughts on “How to Sell a Business: The Ultimate Guide (2021)”

  • Gean Viray

    Thank you for this article! I’ve opened up a small online business last year to help with expenses. Unfortunately, I have to close it down as I underestimate the time and effort required to build one while keeping up with my day job. Anyway, hopefully, you can also make an article on how to negotiate to be a co-owner/investor when selling your business. Thanks again 🙂

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