How to sell a business
Whether you’re retiring, going back to the workforce, or starting something new – you’ll probably want to sell your business someday. It helps to know what the process looks like and how to position yourself for the smoothest (and most profitable) transition.
- Making a plan
- Preparing your documentation
- Getting your business valued
- Finding a buyer
- Managing offers
- Due diligence
- Changing ownership
1. Making a plan to sell your business
Selling a small business in the US takes time. To get the right buyer at the right price can involve months of work and a bit of luck too.
It’s better to start the process early. That way you don’t feel rushed when the time comes. What’s more, being sale-ready means you can act fast if someone makes an offer out of the blue (it happens!). And finally, the steps to preparing for a sale will help you find and fix things that could be better in the business, which is always a good thing.
Keep your financial advisors close. Bookkeepers, accountants and tax professionals know how to sell a business. They’ll help get your documentation in order, while also helping to make the sale tax-efficient. Don’t have an accountant or bookkeeper? Find one in our advisor directory.
2. Preparing your documentation
Your first goal when selling a business is to nail down all your paperwork. This is a big job so give yourself ample time. There are three main areas where you’ll need things in writing.
Buyers will want to see three years worth of financial records. That means you’ll need income statements to show the business makes money; balance sheets to show the value of business equipment, property and inventory against the debts it owes; and maybe cash flow statements to confirm your business makes money from operations (and not just selling assets or taking loans).
Supplier agreements and customer contracts
Where you can, renew agreements with customers and suppliers – especially if they’re critical to business performance. If there’s a big client that represents half of your revenue, a prospective buyer is going to want to see they’re locked in to using you. Similarly, if you have a great deal on supplies, get it in writing.
Formalize your ways of working. Write down how the business operates, who’s responsible for what, what order things get done in, and what systems you use. Think of this as a manual for running the business that will help a new owner hit the ground running. Don’t write this all at once or you’ll burn out. Document a different aspect of operations each week. If you have employees, have them write the parts that are relevant to their jobs.
Getting your business valued
OK, here’s the million-dollar question (well, hopefully it’s a million-dollar question) – how much is the business worth? Figuring this out takes special skills so you’ll need professional support.
Some accountants can do an evaluation so, if you’re selling your business to a known buyer, such as an employee or family member, then you might want to go that route. If you need to find a buyer, however, then you might want to hire a broker to help with the valuation as you’ll need them to market the business anyway.
Three methods of business valuation
When selling your business, an expert can take three approaches to estimate its value:
- Asset-based methods: where valuers use the balance sheet to calculate all the assets belonging to the business then subtract any liabilities. This is often used when a business is liquidated.
- Earnings-based methods: where the business is valued in line with its track record for generating profit and cash. You’ll need solid financial records to pull this one off.
- Market-based methods: where valuers take a figure such as sales revenue and multiply it by a certain number. This method may be used in certain industries, with each industry having its own accepted multiplier.
A valuation is only a guideline for negotiations. The final transaction price is often influenced by a range of factors, such as your eagerness to sell, the buyer’s strategic interests, and how easily buyers can secure financing.
4. Finding a buyer
Not all buyers are equal. Ideally, you want one that offers the right price and is a good partner in the transition. That second point is especially important if you’ve agreed to stay involved in the business for a period of time, or if the final price is dependent on the business maintaining performance.
Businesses are often sold to family members or employees, with the advantage being that you already have a good relationship with those people. If that’s not an option, you could approach your suppliers, customers or competitors. They all know the business, at least.
Your accountant may also be able to help find buyers. They generally have lots of entrepreneurs in their network. Bankers, lawyers and other business consultants may have suggestions too.
If there aren’t any leads in your network, then brokering services can help you connect with buyers. They may choose to list your business with certain publications or databases.
5. Managing the offer
Once you‘ve met some legitimate prospects and given them the lowdown on the business, you might start fielding offers. If there are several prospects circling, try to give a fair timeline for everyone to submit an offer.
When selling a business, the offers you get will (or should):
- lay out the price
- identify conditions to be met before closing the deal and set a date for closing
- note any conditions to be met after closing
- specify how and when the money will be paid
- explain any training or support they need from you, and for how long
The offer may also suggest a time frame for due diligence, during which the buyer will run their own checks on the business to make sure they’re getting what they expect.
Be aware that some prospects may only make an offer if you promise to negotiate solely with them for a period of time. Others may make the final offer contingent on the business performing well after handover. This is to protect against sales tanking once the owner has left. Business brokers can be a big help in deciding which offers to entertain and what conditions to accept.
6. Due diligence
Due diligence is the buyer’s chance to check under the hood of the business and make sure it lives up to your sales pitch. This step often comes after a conditional offer. Your typical buyer will run a legal, financial, and commercial due diligence.
Legal due diligence
They’ll see if there is any pending or ongoing legal action against the business. They’ll also check up on things like copyright, trademarks, patents or service agreements.
Financial due diligence
They’ll dive into the business books to check that the financial statements are accurate. They may ask for additional reports and forecasts, or run some themselves. They’ll also check the business credit rating and possibly the tax history of the business.
Commercial due diligence
Your buyer will also take a wider look at the business and the market it operates in to confirm there’s still opportunity for growth. They’ll review existing strategies and competitors and the overall business model to ensure the business will remain profitable.
How to speed up due diligence
Selling a business can seem long and drawn out even before you get to due diligence. If you want to speed up this step, provide a complete set of well-maintained financials, a file of agreements, and a written business plan (here’s a template). Running your books on accounting software also allows you (or them) to generate more reports as needed.
7. Changing ownership
You don’t get to just dust your hands and walk away after the deal is closed. You may need to do things like:
- issue your final business tax returns
- declare proceeds from the sale to the tax office
- Companies and Corporations will need to amend Articles of Organization to reflect new ownership
Again, a business broker, accountant or bookkeeper will help make sure you tick all the boxes. An accountant can also provide tax planning around the sale to help keep control of the taxes you have to pay.
Selling a business is a process, not an event
Ideally, you want to start selling your business long before you’re ready to actually exit. For most small businesses, it takes a long time to tidy up financial records, nail down all your agreements, document internal processes, and refresh your business plan. And trying to do them all at once, in a race against the clock, can be overwhelming.
Give yourself the longest runway you can and break the job into bite-sized chunks. Get employees and consultants to help where you can. Speak to other people you know who’ve done it and ask for their tips on how to sell a business. You may be surprised just what you can get for your business if you take the time to set it up properly for sale. Learn more about a small business exit strategy.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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