If you’re thinking about selling a business, this guide was written with you in mind!
In it, you’ll learn everything you need to know to sell your business for the top dollar. You’ll also find out what legal documents you need, how to organize your financial records, the very best marketplace for selling your business, and so much more.
Ready to get started?
Then let’s go!
1. Get Ready For The Sale
Finding the right buyer to sell your small business to can be an incredibly challenging and time-consuming process. According to SCORE, a sale might even take up to two years!
You should start preparing to sell your successful business at least one year before the actual sale.
This will give you time to allow you to organize your financial records and boost your customer base. It will also give you time to and spruce up your operations to make your small business more appealing to small business buyers.
Here’s what you need to do when you’re selling your business (which also functions as a selling a business checklist):
2. Organize Your Financial Records
Get your financial house in order before EVEN thinking about how to sell your small business to potential buyers.
Make sure you have financial statements and tax returns for at least the past three years, and that all your paperwork is clear and well-organized. Have your accountant see that all income is accounted for and that your personal expenses are entirely separate from your business ones.
Most purchasers of a small business want to look at up to five years of profit and loss statements, tax returns, leases, and customer data.
Here are the financial documents you need when selling your business:
- Profit and loss statements for the past three years
- Current balance sheet
- Cash flow statement
- Business tax returns going back three years
- Personal financial statement for the buyer to complete
- Note for any seller financing
3. Create An Information Packet
Put all the information small business purchasers will need to make an informed choice in a packet. Only hand this out to potential buyers you pre-qualify (more on that later).
Some of this can also serve as an operations manual to make the early days of owning the business easier for the new owner.
Here’s what it should have:
- Fact sheet (all the essential things about your business on ONE convenient page)
- Financial documents
- Employee list
- Marketing strategies that worked
- Search engine statistics
- Keyword research
- Customer demographics
- Information on competitors
- Market data
- Documentation of income and expenses
- ROI analysis
- List of equipment being sold
- Vendors your company does business with
4. Hire a Lawyer
You’ll need to hire a lawyer to draw up the following legal documents:
- LETTER OF INTENT: This lists the conditions, terms of the transaction, due diligence terms, deposit amount, and any other relevant terms of the agreement. Sometimes, potential buyers will submit their own letters of intent subject to your approval.
- BUYER’S DUE DILIGENCE: This is usually included as part of the letter of intent. It is the research that a potential buyer will conduct to verify that the deal is legit. It often entails a process of looking at all financial documentation, customer records, profit and loss statements, and sales reports.
- PURCHASE AGREEMENT: This is the next step after the letter of intent is signed, and due diligence has been done. It’s a legally binding contract that locks in the price and other agreed-upon terms before you sell. An Asset Purchase Agreement is often part of this document if a buyer doesn’t want to buy or you don’t want to sell all the assets.
You might also need this paperwork:
- Non-Disclosure Confidentiality Agreement
- Buyer Financial Statement Form
- Offer-to-Purchase Agreement
- Note of Seller Financing
5. Boost Your Customer Base
The optimal time to sell your enterprise is when both you’re enjoying robust annual revenues, and everything looks rosy in your market sector. There’s never going to be that one perfect moment when everything comes together in shining moment of everlasting perfection.
However, potential buyers will want to purchase a business that has a bright future. If your sales are on a downward spiral, try to reverse this troubling trend by doubling your marketing efforts before offering your business for sale.
By boosting your cash flow, you’ll show the new earner that’s there’s long term potential in your enterprise.
That way, you have a robustly healthy business to offer to buyers—not one struggling to stay financially afloat. Also, if you have one major customer representing more than 20% of your total earnings, a potential purchaser might get nervous.
That’s because she might realize that if the client decides to do business elsewhere, the entire enterprise could come crashing down—making the business she just purchased worthless.
To make your company more enticing to prospective buyers who are in it for the long term, try to diversify your customer base before selling.
6. Spruce Up The Premises
Spruce up your premises before you put your business on the market. Slap on a coat of paint on walls that look run-down and ramshackle.
Any equipment that’s broken should be repaired before the sale.
Jettison outdated merchandise stockpiles and make sure everything is looking contemporary, bright, and shiny.
7. Figure Out Your Business’s Worth
Small businesses are usually worth three to six times their annual cash flow. This number depends on LOTS of things, including:
- Overall financial health
- Market demand
Your selling price will usually be a multiple of your SDE, or seller’s discretionary earnings for business. That multiple depends on the industry you’re in.
Here’s how to calculate your SDE:
Annual Sales – Cost of Goods Sold – Expenses + Owner’s Wage = SDE
This formula is used only for businesses with gross annual sales that are under $1,000,000.
Next, multiply your SDE by your industry-specific multiple. Here are a few of them:
A qualified professional can also do this estimate for you. This way, you’ll make sure your business isn’t priced too high or too low. He’ll assess your business for a set fee (usually between $3,000 and $7,500), looking at things like sales, inventories and other assets, and any debts or liens.
For more on valuing a business, read our article on the subject.
8. Find A Marketplace To Sell Your Business
There are advantages to being your own business broker, including not paying a broker’s commission. It’s also an excellent way to go when you’re selling to a family member or a current employee.
If you need free templates for documents of sale, you can find them here.
Here are some places you can list your business for free:
(Of course, the first one is our own website)
9. Pre-Qualify Your Buyer
If you decide to sell your business yourself, you need to pre-qualify buyers.
This makes the process of finding a buyer so much easier!
A HUGE reason deals falls through is because sellers too frequently enter into negotiations with buyers who don’t have the financial ability to purchase a company. Sift through all the offers and focus ONLY those buyers who are the strongest candidates.
Keep in mind that most people who respond to your ads will NEVER make a purchase. Some of them are merely wannabe business owners who desperately want to buy a business but are financially unable to.
Others are rivals who sneakily are pretending to be buyers so that they can amass TONS of competitive intelligence about your company to use against you.
There are even those called “SHARKS” who are looking for those desperate to sell and willing to unload their business for an abysmally low price.
10. Establish Your Criteria
To effectively screen a potential business owner, you’ll want to make a list of things that need to happen before finalizing the deal.
Here are a few things that should be on your list:
- How much cash will you need on closing day?
- If you’re willing to finance people who want to be business owners, what will you accept as collateral?
- How soon does the buyer want to buy my business?
- Are they SBA pre-qualified?
- What’s an acceptable credit score range?
If you’re working with a broker, she’ll handle the task of collecting information that verifies the buyer’s financial ability. If you’re working without one, you’ll need to confirm those details on your own.
This involves asking for copies of bank and other financial statements.
Generally, a prospective buyer will have between 60 and 120 days to verify that the deal they’re considering doing is legitimate.
This is called doing “due diligence.”
Your buyer will evaluate every facet of your business like a jeweler examining a diamond for imperfections. Due diligence protects both the buyer and you from potential liabilities and hidden financial problems.
The Letter Of Intent
Your prospective buyer solidifies her interest in your enterprise with a letter of intent. This is a non-binding agreement that establishes the broad outlines of the proposed deal and shows that both parties are committed to striking a bargain.
11. Negotiate a Deal
Make sure you have all the information you’re going to need to negotiate a killer deal.
Remember, knowledge is power!
Discuss exactly what assets you’re selling and how you’ll get paid. Allow for some wiggle room, but don’t budge if you think your asking price is reasonable.
The buyer might want you to sign a non-compete agreement, which means you won’t start a competing business that’ll cut into the buyer’s customer base.
You’ll also have to agree on contingencies, which are conditions that must be met before the sale is complete. They might include:
- An audit of your financial records
- The buyer puts money in escrow
- The buyer gets qualified for a loan
Often, the new owner will want there to be an agreement that the previous one assume an advisory role for a specified period.
12. Close the Deal
Once you’ve agreed to a deal, it’s time for the closing.
This is when you finally transfer the business and all its assets to the new owner by signing the final contracts. To help make the process a seamless one, make a list of everything you’ll need to bring with you.
This includes not only the paperwork, but also such things as lists of contacts and customers, keys, and alarm codes.
How to Sell A Business Quickly
The best way to sell your business quickly is to offer it to a buyer with a small down payment and an earnout based on performance.
An earnout is a provision written into a deal where a business’s seller will receive a percentage of future earnings. This eliminates the risk of purchasing the company as the buyer only pays a portion of the sales price upfront.
The rest of the sales price will come out of what the business makes in future years.
Those are the 12 steps to selling a business. If you want to buy a business, check out our article about how to do that.
And if you have an established business for sale, list it with us!
We’ll show you how to sell your business online.
Unlike some brokers, we work with both buyers and sellers. This way, we can ensure that all parties are perfectly matched, resulting in incomparable satisfaction and unparalleled results.
Contact us today, and we’ll be your business broker!