One of the first questions an owner considering the sale of their company asks is: What is the process of selling a business?
And it’s a great question. Most business owners only sell one business in their lifetime, so they have no clue where to get started.
I won’t lie to you... selling a business isn't easy. There are many potential pitfalls along the way, and several important steps you need to prepare for.
To help you gain an overall understanding of the process, we've laid out a simple step-by-step outline for what's involved.
We started at the point you decide you're ready to move forward with a sale and wrapped it up with your post-sale training period.
Let’s jump right in!
The 7 Steps to Sell Your Business
1. Locate a Quality Business Broker or M&A Firm
While you certainly have the option to not list with a broker at all, accept the fact that selling your business will be tough to navigate. Since your business is probably one of the single largest components of your net worth, we highly recommend having representation throughout the process.
That said, there is an enormous difference in the quality and experience of business brokers and merger and acquisition (M&A) advisors, so take the time to thoroughly research and interview the person or firm that will represent you in the sale.
Remember, you'll be spending an average of 6 to 12 months together and a quality intermediary will be worth their weight in gold.
Be sure to understand how much the firm will charge, and what services will be provided during the process.
Business brokers generally deal with main street businesses that have revenues up to $1 million. It's industry-standard practice for business brokers to not charge an upfront fee, and they commonly charge a flat ten percent success fee upon sale.
M&A firms typically sell companies with revenues between $1 million and $100 million. These firms may, or may not, charge an upfront fee or "retainer". Instead of a flat ten percent success fee, they typically use a graduated pricing structure.
The most common pricing structure is known as the Double Lehman Scale, which calculates commission starting at 10% for the first million in transaction value, then 8% for the second million, 6% for the third, 4 percent for the fourth, and two percent for any amount exceeding $4 million in transaction value.
2. Gather Documents
When you plan on selling your business, you should ensure that you have the following documents prepared:
- Business Federal Tax Returns
- Profit and loss statements (P&Ls)
- List of equipment and any equipment lease agreements
- Real estate lease agreements
- Permits and license paperwork
- Corporate governance documents (articles of incorporation)
- Employee manual and operations manual, if available
With the exception of the employee/operations manuals, these are the bare minimum documents we would recommend. If you have kept your documents and finances organized over the years, these items should be fairly simple to gather.
There will be much more documentation that is requested during due diligence, but these will get you started. Depending on your company, there may be other documents you will need to provide, so it is always best to check with your broker about the documents they need from you.
3. Set a Price
When determining the value of your business, there are a few ways you can get an idea for what your company is worth, such as:
No matter where you choose to get a valuation, we recommend you locate a reputable broker that performs valuations for business sales on a regular basis.
At a minimum, they should abide by the International Business Broker Association (IBBA) standards.
Even better, locate a brokerage or M&A firm that has received training and accreditation from one of the following:
- Business Certified Appraiser (BCA) accredited by The International Society of Business Appraisers (ISBA)
- Certified Valuation Analyst (CVA) accredited through the National Association of Certified Valuation Analysts
- Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers
- Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers
- Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants
- Accredited Valuation Analyst (AVA) accredited through the National Association of Certified Valuation Analysts
- Accredited Business Certified Appraiser (ABCA) accredited through the International Society of Business Analysts.
4. Prepare Marketing Materials
Whether you list with a broker or not, you will need to put together marketing materials to advertise the sale of your business. Some marketing materials you can create to advertise your business for sale include:
- A web write-up of your business
- A teaser video detailing the opportunity
- A confidential information memorandum (CIM)
- A marketing video of your company
Before administering any marketing materials with confidential information, you should ensure that you qualify buyers and have them sign a non-disclosure agreement (NDA) first.
5. Find a Buyer and Enter Due Diligence
Finding a buyer is one of the most exciting parts of selling your business, but it’s also the least predictable. We try to make this step simple for sellers by breaking it up into stages that fully qualify each buyer:
- Initial contact from the buyer - The buyer calls or emails us in regards to the listing. We speak to them about the opportunity and gauge their interest.
- Administer forms to the buyer - We require the buyer to fill out a non-disclosure agreement (NDA) and personal financial statement. We also have them send us a photo of their IDs.
- Share more information - Once the buyer has signed the NDA and completed the other screening processes, we will give them more information about the business.
- Interview the buyer - If they are interested in learning more about the company after we have sent them more information, we will perform an in-depth interview.
- Buyer/ seller video call - If we find a buyer that is a fit, we will set them up to have a video call to discuss higher-level details about the company.
- In-person meeting - If the video call goes well between the buyer and seller, then we will arrange for an in-person buyer-seller meeting to tour the facility, talk about the business, and answer any of the buyer’s questions.
When you are selling your business you will go through this process with your top prospective buyers. Once you are confident about particular buyers, you can share higher-level pre-due diligence information.
However, it is key that you do not share important information such as customer lists until you officially sell your company to a buyer.
When you receive an initial offer from a buyer, it will typically come in the form of a Letter of Intent or an Indication of Interest:
IOI: Indication of Interest - This document outlines the proposed terms of the offer at a very high level. It will generally cover price, training period, and a timeline for due diligence and closing.
LOI: Letter of Intent - This document includes more details than an IOI. This is one of the most common documents our clients receive. This will then be drafted into an asset purchase agreement later on.
We prefer to see an LOI because it’s more detailed and allows you to make a more informed decision on your buyer.
Although IOIs and LOIs are traditionally non-binding, they can have binding language that you need to understand before signing. It is important to review any of these forms with your attorney for legal guidance.
6. Navigate Due Diligence & Execute Purchase Agreement
Once you sign your LOI or IOI, the due diligence period begins. This period is similar to the due diligence period when buying or selling a home, but far more in-depth. The buyer will have the opportunity to request documents and confirm the accuracy of the information that they’ve received.
If a seller was thorough in their preparation for the sale, this period should simply be a confirmation period for the buyer. However, if a buyer uncovers information that does not match what they were told, they may request a reduction in the purchase price or a change of deal terms.
For example, if a seller represents in the early stages of negotiations that an employee is managing daily operations, and during due diligence, it’s uncovered that the employee is actually just a middle-level manager and the owner is the true operations manager the buyer may request an extended training period to compensate for that.
Due diligence is also the time to work on the asset purchase agreement, and ultimately sign.
Asset/Stock Purchase Agreement - This is the legal agreement that will govern the terms of the sale. Its contents are based on the structure of the buyer’s LOI or IOI, but it is far more detailed. Usually, the buyer’s attorney will be responsible for producing the first draft while your attorney will review, edit, and provide guidance to protect your interests.
Once the purchase agreement is complete, you will enter one of the most sensitive stages of the deal.
Without a broker or attorney’s assistance during this phase, negotiations and deals can fall apart.
7. Notify Key Employees
In a majority of cases, we recommend waiting until the sale of your business is complete to notify your employees. However, throughout the process there are going to be times when buyers are requesting financial reports, touring the facility, and conducting their due diligence. These activities can pose real risks to confidentiality.
If you have a key employee or even a team of key employees who you feel would be difficult to keep from finding out or who would be a valuable asset during the process, you may want to tell them ahead of time.
So, what’s the best way to deliver that news?
Some employees may understand your reasons for the sale, whereas others may worry about their jobs or what the new owner will bring to the table. When and how you decide to tell your employees is going to be a tough decision, but here are some useful ways to communicate the news:
- “You're a very important part of this business, so I need your help to find the right buyer.”
- “It’s important to me to protect you and the other employees during this process.”
- “I want you to be a part of the sale because you are an important part of this company.”
- “I will not sell to anyone unless I believe they have your best interest in mind.”
When choosing to tell an employee you are going to sell, we suggest you speak to your broker or attorney regarding the verbiage. We have seen some business owners use a non-disclosure agreement (NDA) when telling key employees. However, NDA’s in this particular instance can sometimes elicit negative reactions.
8. Closing and Post Sale Requirements
Once you’ve navigated due diligence, executed the purchase agreement, and performed the closing, it’s time to train the new buyer.
The training period is a phase where you train the buyer on everything they need to know to run the business. This training phase is determined as you are drafting up the deal with the buyer.
Your goals for the sale and the deal you negotiated will determine how long your training period will be. As we mentioned in our blog “How Long Does it Take to Sell a Business?” the training period is usually between 15 and 90 days.
If you will be training your buyer, you will be paid your usual salary during the time or you will receive a set hourly rate. If the training period is longer, the hourly rate may be higher.
How You Can Get Started on Selling Your Business
As we stated above, you should begin by performing research, then interviewing a few brokers or M&A advisors.
If possible, begin this process long before you're ready to begin the actual sales process. Most advisors prefer to work with clients long before it's time to head to market.
And a quality M&A advisor shouldn't try to automatically list your business when you first contact them. They should begin by asking a few very important questions. A few examples are:
- Why do you want to sell?
- Do you have a well-thought-out plan for what you're going to do after the sale?
- The sale is most likely going to fund your retirement or an investment... have you determined what you need to accomplish those goals?
This mental preparation will help you become confident and intentional about your decision to move forward.
If you'd like assistance on the sale of your business, fill out the form below or call us today for a free consultation.