Keep These 4 Things in Mind Before Selling Your Small Business
Selling a small business for the maximum value to the right purchasers on the right terms can be a tremendous challenge, even for experienced business owners. Buying and selling an existing company is a complex process, but one that should be demystified. At its most basic level, the process is straightforward, just like the purchase of a single item. The small-business owner sells the object (in this case, their own business) to a potential buyer for an agreed-upon price and mutually acceptable terms. Yet, as always, the devil is in the details -- in this case how the deal is structured.
With that in mind, here are four key things you’ll need to remember when it’s your company that’s being sold.
1. Understand the whole process.
While every business sale has its unique features, we can outline a general process. As a preliminary matter, you determine the value of your business. This helps establish a range of reasonable prices for the company. Next, the seller (or, more often, the seller’s broker) reaches out to potential purchasers. They prepare an offering memorandum, or informal document that paints a basic picture of the business and what's included in the sale. (More on this in a bit.)
Once a serious candidate emerges, that interested party conducts due diligence to make sure what’s promised in the offering documents matches the company’s reality. If that investigation checks out to the buyer’s satisfaction, the parties negotiate the key terms, including but not limited to the price. Finally, after you reach a purchase agreement, you execute all the necessary legalities. This means you prepare the contracts, then review and sign them.
Obviously, this process can be far more complicated, as is often the case with publicly traded companies. For most small to mid-sized companies, though, this is generally how things unfold.
2. Get the right help on board.
It’s important to align yourself with the right seller's agent or representative for support and guidance before taking first steps, especially if you’ve never sold a business before. Ideally, this is a person with proven expertise and familiarity with the current state of your company’s industry. Your seller’s agent acts in your company’s best interests in finding the right buyer. They can assist you with advice and representation throughout the process.
A good agent will also help you secure other valuable team members. These may include an experienced business-valuation expert and a specialist attorney or CPA who can help advise you on the tax implications of your sale. Even if you’re selling a small business, it can be a major undertaking.
3. Show your prospective buyers the money.
Unlike selling your bicycle through the local classified ads, your business sale requires a formal assessment of exactly how much your company is worth. Qualified prospective buyers will want reassurance that your company is worth your asking price.
A proper valuation of your business and its assets protects both you and your purchaser, so getting this right is in your best interests. Ideally, you’ll want a range of potential values tied to specific market or sale factors. Cash flow, intellectual property, financial statements, customer base and management team can all play into the transaction. If conditions change or negotiations develop in new directions, you’ll have a better idea of how those developments should affect the sale price.
By demonstrating the true value of your company in a relatively transparent way, you’ll also have a better chance of maximizing the final sales price for your company and thus getting the best possible result.
4. Protect confidentiality and maintain the right level of transparency.
Not every pending sale will close, and not every negotiation will end successfully in an agreement to buy. That's just one reason why it’s crucial to establish a duty of confidentiality between your company and prospective purchasers. Seller’s agents help in this area, but at some point, you’ll probably also want to get a strong Non-Disclosure Agreement, or NDA, signed by the prospective buyers. It’s important not to skimp on this point. Retain the services of an experienced business attorney to draft a firm NDA that will protect your company’s interests while avoiding onerous terms that might scare off a qualified buyer.
Entrepreneurs who ask, "How should I prepare to sell my business?" have often put so much hard work into day-to-day operations that they never spent much time thinking about an exit strategy. That's why it's so important to take each of the points in this guide methodically. Educate yourself and build up your know-how when it comes to looking for a new owner. Spend time determining a selling price, getting to know business brokers and vetting business buyers. No matter what type of business you run, if you do your homework, you'll increase your odds of reaching the sale you hoped for.