How to sell a business, step by step
While every entrepreneur’s journey is different, these are the steps you can typically expect to take when selling a business.
Step 1: Determine your commitments
While preparing to sell a business, it shouldn’t suffer. Selling a business takes time and energy. Getting too caught up in the process can get in the way of servicing your customer base.
Chart out an exit strategy to prepare for the sales process well in advance. For example, have a plan in place for any outstanding invoices and get the financial records up to date for prospective buyers.
You don’t need to know the exact amount of time needed to take care of every task, but it will help you come up with a timeframe for a successful sale. It will also help you plan what kind of professionals you need to hire.
Step 2: Hire professionals
Knowing how to sell a business is important, but equally important is knowing where to bring in help.
To jump to our overview of professionals to hire, click here. But as a quick rule of thumb, start with an accountant and attorney. Outside of that, it’s up to you to determine how much help you need from appraisers, brokers, or consultants.
Once you’ve found and contacted them, any of these professionals should be willing to sit down with you for a free consultation. Here are some useful questions to ask an appraiser, a broker, and a consultant.
Step 3: Make improvements to the business
Before selling a business, invest in improving its profitability and the efficiency of its day to day operations. This will help you get the biggest sale price possible by boosting the value of your business. The changes you make will depend on the type of business, but here are some ideas to get you started.
Put on a fresh coat of paint
If you have a brick and mortar location, simple updates—new fixtures and furniture, or even a (literal) fresh coat of paint—can help the business look more desirable to potential buyers.
Smooth out the operations
The business operating system (BOS) is the rulebook for how the company runs and how employees work together to achieve goals. A BOS that’s disorganized or poorly implemented doesn’t look good, and hurts the profitability of the business. Replace it with a new system, or revise the current one to make it more efficient.
Sell, sell, sell
Focusing on boosting sales before selling a business will make it look more attractive to buyers. This is especially the case with individual buyers—as opposed to organizations—who may be looking to benefit from the immediate cash flow that comes with buying a high-revenue business.
Diversify the client list
If more than 20% of your business consists of a single client, you could be at risk of giving buyers cold feet. After all, if that client decides they don’t like the new owner and decides to churn, it will put a huge dent in the profitability of the business. Leading up to a sale, try to take on new clients and diversify your portfolio, so this is less of a risk.
Step 4: Organize your financials
When it comes to financials, prospective buyers want as much transparency as possible. You’ll need at least three years of clean financial statements (balance sheet, income statements) to present to prospective buyers. Make sure that all income is accounted for.
You should also make sure you have a bookkeeping solution in place, so you can guarantee the new owner ongoing, up-to-date financial info.
Finally, if you have any assets on your business books that you’d like to keep for private use—such as vehicles or equipment—be sure to transfer them off the books. These assets need to be legally transferred into your possession, so they’re not falsely recorded as belonging to the business you’re selling.
Step 5: Set the sale price
Does your business rely on proprietary information or specialized knowledge? If so, you’ll get the most realistic business valuation from an appraiser or broker.
If you’re determining your own asking price, you should generally plan to set it at one to four times the seller’s discretionary earnings (SDE).
The SDE consists of:
- Your business’ annual net income before taxes
- Money your business makes from investments
- Depreciation and amortization of business assets
- Your personal compensation and benefits
- Non-recurring expenses.
The number by which you multiply the SDE—one to four—is determined by the current state of the market, your business’s competitiveness, and other factors. These are hard to pin down, but a qualified business consultant can help you figure out the SDE multiplier when selling a business.
Step 6: Get your paperwork in order
Besides financial records, you need certain legal documents to be prepared before you make a sale. The most important is the asset purchase agreement—a legal contract for selling your business’s physical and intellectual property.
This document typically runs 25–50 pages in length, and draws on your financial records. Often, the asset purchase agreement will also list your obligations as former owner. Most commonly this means staying on with the business for a set period, to consult with the new owner.
A non-compete may also be required. This would state that you do not intend to start a new business that would be competition to the old one you just sold.
Preparing one of these documents is a time-consuming task, which is why it’s important to hire an attorney who can handle it for you.
Step 7: Prepare a selling memo
The selling memo is an integral document when selling a business.
You provide the selling memo to prospective buyers, giving them all the information they need about the business so they can consider making a serious offer.
Your selling memo will include:
- An overall description of the business
- Information on the location
- The business’s strengths
- An overview of the competitors
- A description of the products/services
- Information on the day-to-day operations
- The marketing plan
- Key employees and managers
- Growth projections
- Potential buyer concerns
- Financial information
- The asking price and terms of sale
If you hire a broker, they will prepare the selling memo for you.
Step 8: Put the business on the market
One major challenge you face when advertising a business for sale is maintaining confidentiality. If clients or employees find out you’re planning to sell, they may get skittish. And competitors could interpret the decision as a sign of weakness, and take advantage of it.
That’s why it’s usually wise to hire a broker. Not only will they have a large network to draw on, they’ll know how to discreetly approach potential qualified buyers.
However, in the event you do decide to sell a business without help from a broker, online services have made doing so easier than it once was.
Step 9: Negotiate the sale
When the right buyer is ready to purchase the business, they’ll submit a letter of intent to purchase. This document is non-binding; either you or the buyer can back out at any time.
It’s rare for a buyer to back out, though. By this point, they’ve already invested significant time in researching the business and putting together an offer.
Now, you may either accept the offer, or enter into negotiations with the potential buyer. Negotiating the sale of the business is its own special art form, and you may want to draw on advice from a business consultant during the process.
Step 10: Finalize the sale
Once you accept a letter of intent, you should expect to wait while the buyer performs due diligence. They’ll take a set period of time, from two to four months, to do this.
For the sake of due diligence, they’ll examine your business’ assets and liabilities, financial history, inventory, staff structure—just about anything that affects the day-to-day running of your business.
Due diligence is your buyer’s chance to get an in-depth look at your business, and make any necessary last minute moves—borrowing extra cash, or looking for additional staff—before officially taking over.
The sale of your business is completed when you and the buyer sign the asset purchase agreement prepared by your attorney, and any other supporting documentation that may be required depending on the specifics of your business.
The professionals you need to hire
A guide on how to sell a business can give you the steps you need to take, but professionals can ensure you’re getting the maximum value and cover you legally. That’s why it’s best to get a little help from your friends—“your friends,” in this case, being paid professionals.
At minimum, you’ll need to work with an attorney and an accountant.
An attorney can help you prepare the legal documentation for the transfer of assets, and make sure nothing you’re doing is likely to get you sued.
An accountant prepares the financial records you need to prove to prospective buyers your business is worth investing in.
Then, you should consider hiring an appraiser. For a fee—typically $3,000 to $7,500 for small businesses—an appraiser will tell you how much your business is worth so you’re getting the maximum value.
An appraiser will survey:
- How much money your business owes
- How much others owe your business
- Your business’s inventory, and other assets
- Past tax returns
- Your receivables and sales
Then, they’ll take into account the condition of the market, and your business’s place in it, to determine an asking price that will be attractive to buyers while also getting you the best price.
However, you won’t need to hire an appraiser if you hire a business broker. A broker will both appraise your business, and put it on the market for interested buyers. Typically, they’ll charge 5–10% of the commission price. Brokers find business buyers for you by preparing a prospectus for it, listing it on marketplaces, and tapping into a large professional network.
Finally, before putting up the “For Sale” sign, consider hiring a business consultant. Someone with experience in your industry can tell you ways to improve your business before making a sale so it will look more attractive to potential buyers.
Who to sell a business to
Equally important as how to sell a business is who you’re going to sell it to.
You can sell a business to a variety of individuals or entities. There are pros and cons to dealing with each.
Selling a business to an individual on the market
This is like selling your house on the market. You put it out there, and see which individual shows the most interest in becoming a small business owner (for the highest price).
Pros: Since the business is up for sale on the open market, you have the highest chance of finding someone willing to meet the conditions of the sale—for instance, an all-cash closing.
Cons: To sell on the open market, you will likely need to hire a broker who charges commission.
Selling a business to a family member
Roughly one-third of business sales are between family members. This can take the form of handing off the business to the next generation of owners.
Pros: As the business gradually changes hands and your family member takes over, you’ll still have some say in how the business is run. Also, a change of hands between family members means a smoother transition for staff and clients.
Cons: It’s unlikely you’ll be able to get the highest possible asking price for the business when selling to a family member.
Selling a business to partners
If the business operates as a partnership, you have the option of selling your shares to your partner. Most likely, when you formed a partnership, you signed a buy-sell agreement. This document outlines the price and procedure you need to follow to make the sale.
Pros: Following a predefined path for making the sale requires minimum effort on your part, and has a low impact on staff and clients.
Cons: Even as the buy-sell agreement makes for a quick change of hands, you may find yourself stuck with a price that seemed attractive when you signed the contract, but has become less appealing as the business has increased in value.
Selling a business to an employee
A trusted employee who’s great at their job and knows the business inside and out could make the perfect business owner—and the ideal buyer.
Pros: You can plan the sale well in advance. The first step is setting up a legally-binding partnership with an employee. Then, you’ve got plenty of time to arrange the hand-off, and extract yourself from daily operations, before the employee takes over completely.
Cons: As with selling to a family member, selling to an employee is unlikely to get you top dollar for the business.
Selling a business to multiple employees
You may be able to sell the business to qualified employees, if you have an Employee Stock Ownership Agreement (ESOP) in place.
Pros: Taking advantage of existing relationships with employees means you don’t need to put the business on the market. Existing employees are also more likely to run it successfully than a buyer you’ve never met before.
Cons: The ESOP needs to be put in place well before you make the sale. Setting it up demands extra paperwork and professional help.
Selling a business to another business
Large businesses and private equity groups buy companies as investments. In that case, they’re not looking to set it up with a new owner, but to use parts of the business—market share, competitiveness, profitability—to benefit a larger, similar business in their portfolio.
Pros: You’re more likely to secure a better selling price from another business than from individuals, and get an instant payout.
Cons: Depending on the sale terms, you may need to continue managing the business for a fixed period during the transition.