Deciding to sell a business you’ve worked hard to start and build is seldom an easy or hastily made decision, but the truth is that it happens all the time for a variety of reasons.
Why would anyone want to sell something they’ve created?
- Maybe you are a serial entrepreneur at heart and you intended to grow the company to a certain point and then sell it, so you could make a profit and move on to another venture.
- Maybe you’ve had the business for a long time and you’re ready to retire and slow down so you can travel or spend more time with family and friends.
- It could be that you and a partner no longer see eye-to-eye and agree it’s time to move on.
- Or possibly you’ve been offered a great job with an established company that offers less responsibility, greater flexibility, and a reliable paycheck.
Whatever your reason, being sure that you’re ready to sell is crucial before moving forward with the process, as it can be costly and difficult to reverse your decision.
As a serial entrepreneur myself, I know this is an important milestone and I’d like to provide some guidance on what the process is likely to entail and what you’ll need to do to make sure the transition is a smooth one for all parties involved.
1. Decide If Your Business is Ready to be Sold
Prepare an Answer for Why You’re Selling
Potential buyers will ask why the business is for sale, and it’s important that you’re able to articulate your reasons in a convincing and reassuring manner. If your business is running smoothly and you’re selling because you’re ready to retire, relocating to another area, or are planning to accept a position with another company, it’s an easy explanation.
If you want to sell because the company isn’t profitable, or worse still, you’re looking at legal problems or other serious issues, however, it’s likely that potential buyers will be few and selling the company will not be easy. Many businesses have been forced to simply go out of business because they’re unable to find someone willing to buy and take them over.
Remove Any Red Flags
Before you start the process of selling your business, take a good, hard look at whether the company is ready to be sold, and consult a business broker, attorney, tax expert, or other professional if the business is facing issues that will make it difficult to sell. It’s far better to address and solve any issues or problems before putting a business on the market than to find out no one is interested because it’s not in a good position to be sold.
Validate You’re in Compliance
If your company is structured as a C Corporation or a Limited Liability Company (LLC), you’ll need to be sure you’ve kept the business in compliance with all legal matters and have documentation ready for inspection, including Articles of Organization, operating agreement, and any certifications that show the business is in good standing with the state.
Corporations are required to hold annual shareholders and directors’ meetings and keep accurate minutes on each meeting and the decisions made. While LLCs are not necessarily legally required to have meetings and keep minutes, it’s a good practice that most LLC members embrace. Minutes from those meetings should document important decisions made by the Board or members on matters such as agreements, contracts, loans, equipment and insurance purchases, and profit sharing. Maintaining good records improves your reputation and increases your attractiveness to potential buyers.
Hopefully, the operating agreement for your C Corporation or LLC includes procedures for what happens to the business if it is sold, along with how shares and members/shareholders are to be treated.
Once you’re sure your business is in a position to attract sellers and ready to be sold, you can continue on to the next steps.
2. Determine Fair Market Value for Your Business
Figuring out how much your business is worth—a process called business valuation—can be difficult because it’s hard for an owner to be objective and look at the business the same way a prospective buyer would. It’s important to determine a selling price that’s fair to both you and prospective buyers. Overpricing the business can drive off potential buyers, while underpricing can result in missed opportunities for you.
Just as you would do if you were planning to sell a home, one of the best ways to assess the value of your business is by comparing it to similar businesses that were recently sold.
Looking at comparable sales, known as comps, can give you an idea of what buyers might be willing to pay for your business and help you estimate its value. You’ll need to be sure, however, that the businesses you’re using as comps are actually that – comps. If your business is a small coffee shop, for instance, you wouldn’t compare it to a full-scale restaurant.
While using comps is a popular way to evaluate the value of your business, it isn’t your only option. A business broker or valuation expert can help you understand other small business valuation methods, such as the adjusted net asset method, discounted cash flow method, market-based method, or capitalization of cash flow method. How you choose to determine fair market value for your business should be determined by factors such as business type, why you’re selling it, and the financial health of the company.
3. Prepare Your Financials
Certainly, one of the first steps you’ll need to take when getting ready to sell your business is to get a handle on all financial issues. A potential buyer is going to want to know everything possible about the company’s current financial situation and be able to predict its financial success for the future. To make that possible, you’ll need to have some financial documents prepared and ready for their scrutiny.
Take the time to review and clean up your financials:
- Profit and loss statement – A profit and loss statement, or P&L, is crucial because it states your company’s revenue and expenses during a given time period and establishes its ability to generate a profit. Your P&L statement will prove your company’s value to potential buyers, likely increasing the chances of an easy sale. If your company is not generating a profit, you should reconsider your decision to sell until you can turn it around to become profitable.
- Balance sheet – A balance sheet shows the value of a company’s assets, minus its liabilities and owners’ equity. It provides a snapshot of a company’s financial performance at a particular point in time and is used to determine the overall worth of the company.
- Bank statements – You should have two or three months of bank statements available for prospective buyers to review. The statements will enable them to see how much money is in your accounts, how the money moves in and out of the accounts, and any outstanding debt. Any problems with bank statements, such as unaccounted-for deposits or bounced checks might be warning signs for potential buyers.
- Up-to-date list of business assets – You’ll want to make a list of all the assets your business owns. Include tangible assets such as a warehouse or factory, vehicles, and office equipment, as well as intangible assets such as customers, intellectual property such as trademarks or patents, and the value of your business name and brand.
- Detailed list of inventory – This list establishes what items are included as part of the business and which are not. Inventory might include raw materials, office or manufacturing equipment, inventory, and furniture.
- Tax returns – Potential buyers may want to look at tax returns to make sure everything has been handled properly and there are no outstanding tax issues. Hopefully, you’ve kept good tax records and gathering the returns will be an easy task.
- Financial projections – Although financial projections aren’t a guarantee, they can give prospective buyers an idea of your company’s earning potential. Include projections for three, five, and 10 years out.
If your business’s finances aren’t good as they could be, talk to your accountant about ways to make your business look more attractive to buyers. Business buyers want to see evidence of solid cash flow on steady footing, not precarious ups and downs.
A business with no debt is almost always more appealing to potential buyers than one that is not. Even if you’re a few years away from selling, you can take steps to pay down debt. If you have investors, can you buy them out? If it makes financial sense, could you pay off the mortgage on a building or eliminate payments on business vehicles? The fewer encumbrances your business has, the more interested buyers will be. If you do have debt, look for better rates on fixed asset financing. Having debt is not a deal breaker, but it will lower your business valuation and may cause buyers to offer less than your asking price.
4. Make Improvements Where Needed
Just as when you’re getting ready to sell a home, preparing a business for sale requires that you make some improvements to ensure you can get top dollar for your company. If you’ve got a storefront, how’s your curb appeal? Even minor improvements can go a long way in making a building more attractive looking. In addition to appearance, consider the state of your technology and equipment. Buyers aren’t likely to be impressed by technology that can’t keep up or equipment that is aging and not in good repair.
Consider whether you could improve your business brand or your marketing strategy to add value to your business. Examine your online presence and consider hiring someone to help improve it if necessary. Look at your client list and work to expand it if you’re relying on only a few clients for most of your sales, something that can be a red flag for potential buyers. Assess the expertise of any employees you have and how likely it is they’ll want to remain with the company once it’s sold.
Just like a real estate agent can help you stage your house for sale, an unbiased third party can suggest ways to make your business more appealing to potential buyers. Talk to a counselor or mentor at one of the SCORE offices, Small Business Development Centers, or Small Business Administration district offices across the country to get personalized advice. You can also search online for free webinars and guides on selling a business.
5. Market Your Business or Hire a Broker
Once you’ve done all you can to ensure that your business is ready to sell, you’ll need to decide how to market it. You can do this yourself or hire a business broker to do it for you.
Confidentiality is often a dilemma for business owners who are looking to sell. While you want to identify as many potential buyers as possible and make them aware of your listing, most owners don’t want the fact that their business is for sale to be general knowledge with the potential to scare off employees and customers. To get around that, many sellers use blind listings that offer general information about the business without disclosing its identity.
When working to identify potential buyers, consider who might have the skills and experience needed to be a successful owner. The last thing you want is to sell your business to someone who’s not qualified to keep it operating successfully. Likely buyers might include competitors, an employee, an owner of another company, a supplier within your industry, a private equity company, or a family member.
You’ll also need to decide on the channels you’ll use to spread the word about your business. These might include an internet site such as BizBuySell or BizQuest, which are platforms that lists businesses for sale, enabling potential buyers to search by industry, location, and price. Or you could post or advertise your business on a social media site such as Instagram, Twitter, or Facebook, exposing it to large segments of buyers.
Trade journals or business organizations can be effective channels for informing potential buyers about your business. Or if your buyer pool is limited, reaching out directly to prospective buyers could be a valuable strategy.
You can market and even sell your own business, but it requires a level of expertise that most people simply don’t possess. Hiring a business broker costs money, but often results in a greater number of potential buyers and ultimately, a higher sale price. A professional business broker knows how to reach potential buyers that you would not have access to and can help maintain confidentiality around the sale of your business.
Once a buyer has been identified, a broker can facilitate a faster selling process and keep the sale moving forward while you continue tending to day-to-day business.
6. Perform Due Diligence
Once you’ve received and accepted an offer for your business and settled on the terms of the sale, you’ll have to provide a due diligence clause for the buyer. Due diligence is the process of providing the buyer with any documents, data, and other information concerning the company, as requested. The buyer then has a chance to review all the information to make sure there are no problems or concerns regarding the purchase of the company.
You’ll want to have all your financial documents prepared and ready, as well as any information pertaining to legal issues. In addition, prepare any documents that reveal information about how your business is structured and operated. These would include your Articles of Organization or Articles of Incorporation, your company bylaws, lists of investors and shareholders, lists of the states in which you’re permitted to do business, and any other information pertaining to how your business is organized and how it runs.
Your prospective buyer will want to know about any partnerships you might have with other companies, what contracts you’ve entered, loan agreements, outstanding liens, letters of intent, equipment leases, or any other liabilities.
You’ll also need to provide information about customers and employees, including customer databases, purchasing and refund policies, your employee organizational chart, employee contracts, payroll and benefits information, and any other pertinent details.
Performing due diligence can be a complicated process, so make sure to leave plenty of time to get it done and consult help such as your lawyer, broker, or accountant, as needed.
7. Close on the Deal
After your buyer has reviewed due diligence and is satisfied with the findings, you can move toward closing on the sale of the business. You’ll need a purchase agreement to formalize the offer that was made and make the terms of it legal. A word of caution here . . . even if you’ve handled the marketing of your business and done the due diligence on your own, I strongly recommend that you have a qualified attorney review the purchase agreement before signing it. The sale of your business is too important to risk making mistakes.
Once the purchase agreement has been signed and all the financing finalized, your deal is complete.
8. Transfer Ownership of the Business
Once your business has been sold, you’ll need to transfer ownership to give the new owner control of business operations. Even if you’re planning to stay on for a while to help ease the transition, ownership has changed and must be legally transferred. And just a note, if you are planning to remain with the company in an advisory capacity for a limited amount of time, the details of that arrangement should be spelled out in the terms of purchase and sales agreement.
Ideally, the transfer of ownership of a business is done in an orderly manner to avoid any confusion.
Steps necessary for transferring ownership include the following:
- Close your EIN with the IRS
- File your last tax forms
- Close any business lines of credit
- Inform creditors of how bills will be paid
- Inform vendors and others of all contracts that will be assumed by the buyer
- Cancel all registrations, including licenses and permits, DBAs, and others
- Pay all remaining bills
- Distribute any assets remaining in the business
- Pay final wages to employees
- Cancel any insurance policies not assumed by the buyer
- Cancel your lease agreement if no longer applicable
You’ll also want to make sure to provide the buyer with all pertinent information, such as your client list; names of all vendors and suppliers; access information for doors, safes, computers and software; and alarm codes.
9. Submit Articles of Dissolution and Articles of Amendment
If your business is an LLC or Corporation, the business entity must be dissolved after it’s sold and Articles of Dissolution submitted to the state, along with Articles of Amendment, which revise the Articles of Organization you filed with the state when forming the business. Your operating agreement should establish the steps for dissolution of the company, but if it doesn’t, consult the default laws of your state or contact a business filing company or lawyer to assist you.
The members or owners of an LLC or Corporation must vote on the dissolution of the company, according to the terms of the company’s operating agreement or the laws of the state. Some states require a unanimous vote for dissolution, while others stipulate a simple majority.
Make sure to record minutes of the meeting during which members or owners vote, and have a formal document prepared for all to sign. Careful documentation of events is important as it prevents someone from disputing the proceedings in the future.
The Articles of Dissolution you file with the state should include the name of the company, when it was formed, when it was dissolved, and why. Filing that document signals that the company in its current form must cease regular business and hand the reins to the new owner.
Articles of Amendment must reflect the new ownership structure of the company and provide any other relevant information, such as a name change or a new registered agent. Be aware that reporting a new ownership structure of a company when submitting Articles of Amendment to the state will most likely require updating the company’s Beneficial Ownership Information Report, which is a document that names and provides information about those who own, control, and benefit from a company. Not filing the report can result in severe penalties, so be sure to properly complete that important step.
The Articles of Dissolution and Articles of Amendment are important documents that must be properly completed and filed in a timely manner, as some states have requirements for how soon they must be submitted. Your BOI report, which must be filed with the Financial Crimes Enforcement Network within 30 days of submitting Articles of Amendment, is another important document that requires careful attention. A business filing firm can assure that the forms are completed correctly and submitted on time.
Create a Smooth Transition
As you’ve no doubt gathered, selling a business is not a simple process, regardless of its size or structure. There are many steps involved and legal implications, and mistakes can easily derail the sales process or even result in legal action.
I strongly suggest you assemble a team of advisors, including a trusted attorney, CPA or tax advisor, and a business broker to guide you through the process. Professionals can help assure the sale will proceed as smoothly as possible, with all parties benefiting.
