If you’ve spoken with business brokers about getting your business sold, they’ve probably given you a high level explanation of the selling process.
But, with all the moving parts and hired professionals involved, it can be hard to know what your responsibilities are once this process begins.
At MidStreet, we’ve helped hundreds of business owners sell their businesses. Part of our role as business brokers is to inform sellers about the steps they should take throughout the deal.
To help you understand what will be required of you ahead of time, we put together the ultimate checklist for selling a business.
From the moment you decide to sell, all the way to your post-closing responsibilities, this checklist will help you track your progress and feel in control as the deal progresses.
Let’s jump in!
1. Have a strong why
Before you take the first steps to sell your business, it’s important to know your “why.”
Not only is this important to gauge how committed you are to selling, but it’s also one of the first things a buyer will ask when inquiring on your business.
Think about it from their perspective: would you take out loans and spend your life's savings on a business if the owner didn't have a good reason for selling it? Probably not.
Take some time to be honest with yourself about your reason for selling, and ask yourself if you're truly ready before getting started.
2. Talk to your family
This step is a crucial one that sometimes gets overlooked. Neglecting to talk to your loved ones before selling your business can result in unpleasant surprises once the deal is underway.
We’ve seen situations in which a deal team was hired and a buyer was found, but a lack of communication between the seller and their family created tensions that prolonged and eventually killed the deal.
When this happens, it hurts everyone: you, your family, your deal team, and any buyers who were counting on acquiring your business.
Deciding to sell your business is probably one of the biggest decisions you've ever made, so it will inevitably affect those around you. Be sure to discuss this decision with them and make sure everyone is on board before you take any concrete steps.
3. Assemble your deal team
After clearing your decision to sell with your family, you'll need to hire a few professionals; behind just about every successful business sale is an experienced deal team.
Your team should consist of a business broker or M&A advisor, an attorney (experienced in business transactions), and a CPA (also experienced in business transactions).
If you don't have a business broker or M&A advisor in mind, but you have a trusted professional that you 've worked with (i.e. an attorney with transaction experience), ask them to refer you to an M&A advisor or business broker. There's a good chance they'll have a few trustworthy professionals in their network.
Your deal team will be communicating with each other throughout the course of the deal, so it's important to introduce them early in the process.
4. Get a business valuation
Once you’ve hired your deal team, the next step is to get a business valuation. This will generally be performed by your business broker, and will help firm up your decision to sell.
Some business brokers will provide a free valuation in order to build a relationship with you, while others may charge varying fees for a professional valuation.
MIDSTREET TIPIt's important to choose a broker or advisor you trust and manage your expectations during this step in the process. Some business owners have been mislead by others concerning the values of their business, and some use their financial goals as a basis for their business's value. Your business's value is based on its earnings, so manage your valuation expectations accordingly.
5. Decide on your goals
Once you have a business valuation, it’s time to develop an exit plan. Your exit plan should lay out your goals and timeline for selling, and include what you plan on doing after selling your business.
Having a solidified exit plan will help you choose the right offer once buyers start submitting letters of intent.
In some cases, you may receive an offer with a lower purchase price, but it doesn't require any seller financing. Depending on your goals and preferences, this offer could better match your exit plan than a higher offer that will require you to finance the purchase.
After you’ve developed an exit plan, you can begin working with your broker to start the sale.
6. Describe your ideal buyer to your business broker
Similar to developing an exit plan, you’ll also want to develop your criteria for the ideal buyer and share it with your business broker.
Keep in mind, it’s extremely rare for a buyer to check all your boxes. Both you and the buyer will likely have to make some compromises to get the deal done.
Remember, while purchase price is important, it isn't everything. There may be other buyer criteria that can cause you to consider a lower purchase price.
For example, if your goal is to retire immediately after the sale to spend time with family, take care of health issues, etc., then you may want to avoid private equity buyers who may offer a higher purchase price, but often require sellers to continue managing the business after an acquisition.
Conversely, it may be your goal to open more locations each year with the help of a private equity buyer, in which case an individual buyer (who will usually take over as an owner-operator) might not be the best fit.
Knowing this preference ahead of time will help you and your broker focus only on the buyers who match your criteria, saving valuable time and resources.
7. Sign a listing agreement with your broker
To finalize your decision to work with your business broker and begin marketing your business for sale, the next step is to sign a listing agreement.
A listing agreement is a legally binding contract between you and your business broker that gives the broker exclusive rights to sell your business.
You’ll want to have your attorney review the listing agreement before signing anything to reduce your risk in the event your business doesn’t sell.
8. Help your business broker complete marketing materials
One of the first steps after signing your listing agreement is to start helping your broker build your business’s marketing materials.
The main marketing document for your business is called a Confidential Information Memorandum (CIM).
A CIM is a detailed document (often 25-50 pages long) covering the most important aspects of your business like the business history, product/service mix, org chart, growth opportunities, and more.
To create this document, your broker will schedule a call during which they'll learn more about your business and get ideas for the main areas they'd like to highlight. After the call, there will generally be some follow up requests for things like revenue by project/product type, employee lists, equipment lists, etc.
To complete this step, you’ll need to be ready to talk about your business in detail, and make sure you have clean books and records to more easily fulfill the follow up requests your broker sends after your call.
9. Ask your broker for a pre-diligence checklist
A pre-diligence checklist can help you prepare for due diligence by gathering a few commonly requested documents and reports ahead of time.
A pre-diligence checklist will likely include:
- The last three years of financials
- Seller’s disclosure statement
- Other requests depending on the size, industry, and prospective buyers for your business
Hopefully you have clean books and records, but if you know it’ll take some time to access any of the items above (or more detailed reports like profits by job/product type), going through a pre-diligence checklist can help get you ready.
10. Create/Provide an inventory list with approximate values
Buyers will want to know how much inventory is in the business when they purchase it.
This will help them understand how much inventory the business should have in stock to operate, and give them an idea of how long it will be before they start making more inventory purchases after taking over the business.
11. Resolve legal or accounting issues
Buyers in an asset sale will typically purchase a business “free and clear” of all liabilities, including any legal issues. If you have an ongoing legal issue in the business, it’s best to resolve it before transferring the business to a new owner (if possible).
You’ll likely be required to indemnify a buyer for any legal issues that surface after the closing date (if they are a result of something that took place before closing), so it’s best to take care of these in order to have as clean an exit as possible.
Accounting issues are something else you’ll want to clean up before buyers come knocking. We’ve seen accounting issues create problems that ranged from time-consuming headaches to deal breakers.
If your accounting is questionable or hard to decipher, cleaning this up before buyers take a look can help ease the selling process and avoid losing time and money on a deal.
12. Formalize agreements
If you lease your business’s real estate and have a verbal agreement that the lease will be transferrable to the buyer of your business, you’ll want to formalize this agreement in writing by having an assignable lease in place.
This can prevent you from running into any obstacles concerning the real estate associated with your business.
It’s also helpful to have formal agreements in place for the transfer of your business’s contracts with suppliers, distributors, etc. This will help the buyer feel confident they can continue operating the business as usual with your current providers.
13. Spruce up
The physical appearance of your business can be the icing on the cake for buyers interested in your business. It's all about presentation, right?
If your business’s earnings are on the border of the buyer’s requirements, poorly maintained or disorganized facilities can be the factor that causes them to pursue other opportunities.
Taking some time to clean and organize the warehouse, repair the trucks, and put a fresh coat of paint on your building could make the difference between losing a buyer or keeping them on the hook.
14. Prepare for an environmental audit
During due diligence, your business will likely undergo an environmental audit. These audits become more scrutinizing depending on the real estate you occupy and the type of business you own.
The SBA requires phase 1 environmental reports on businesses deemed environmentally sensitive, like dry cleaners, service stations, metal fabricators (unless the business is assembly only) and other environmentally sensitive industries.
15. Receive offers and choose a buyer
Once your business has been listed and you’ve worked with your team of professionals to prepare, you’ll start receiving letters of intent with buyers’ offers.
At this stage in the process, you’ll need to use the buyer criteria you created to determine which buyer best fits your goals for the sale.
If your industry is consolidating or your business is seen as a rare opportunity for buyers, a bidding war for your business could begin.
When this is the case, you’re primed to get the best possible offer for your business, which can make choosing a buyer much easier on you as you prepare for life after selling.
16. Negotiate the purchase agreement
Oftentimes, the buyer’s attorney will draft the purchase agreement.
Your attorney will then give feedback on the first draft, and the two will send their revisions back and forth until you and the buyer are satisfied with the terms of the purchase agreement.
17. Close the deal
Now that you’ve chosen a buyer and negotiated the purchase agreement, it’s finally time to close the deal.
At closing, there are still several final items that need to be taken care of including:
- Finalize closing documents
- Optional closing meeting
- Transfer payroll, supplier and vendor agreements, keys, codes, and other items
- Officially cease operations
For a more detailed look at this step, check out our blog, “Selling a Business: What Happens at Closing?”
18. Training and Consultation
You may be asking yourself, "What step could possibly come after closing the deal?" but hold on for just a little longer.
The final item on the checklist is training the buyer.
The extent of the training period will depend on what you and the buyer agreed to in the purchase agreement, but the maximum amount of training you can provide (if the business purchase was financed through the SBA) is one year.
We’ve seen sellers agree to training periods that lasted the full year, and others that were as short as six weeks.
Throughout this training period, you may provide on-site or off-site training and consultation (or a combination of both). This time is a perfect opportunity for you to set the buyer up for success by walking them through daily operations and introducing them to employees, customers, suppliers, etc.
Congratulations! Once you’ve fulfilled your training obligations, your responsibilities related to the business are officially over.
Each of the items on this checklist provide a high-level overview of your responsibilities. If you'd like a more in depth look at some of these steps, check out the resources below:
The time after selling your business can be highly emotional as you navigate life without the business motivating you each day. But, preparing for the sale and for life after closing is the best way to set yourself up for a successful exit.
Whether you want to sell your business because you’re ready to retire, or you’d like to some help maintaining your business’s growth, contact us today. Whatever your reason for selling, we'd love to help you get the best possible offer for your business.