How to sell your small business
Here is a breakdown of what you need to know to attract a buyer
You started a business to do what you love and to make a living, but there may come a time when you want or need to sell. So be prepared, even if you’re early in your business.
A potential buyer is looking for passion, product, personnel and profit. All four of these must show up in your record of results. Lay the groundwork that will help you run your company more efficiently and invite offers.
How to build a business that will sell
Tell the story of why you started the business and your role
You will have to tell the story of how you started the business and what you did to build it. The origins of a business are integral to getting a buyer interested. It takes enthusiasm, hard work and resilience to overcome the odds and succeed. Sharing your commitment and enthusiasm is part of what’s for sale and the core of brand identity. The buyer must believe your idea can grow – that it has potential.
How you are perceived in the market is also for sale
Brand recognition and business reputations take a long time to build so when someone looks to buy your company, they are also buying these assets. Take care not to alienate customers, suppliers or employees along the way.
Conduct regular reporting and keep careful records
From the very first contract or sale you make in business, keep track of every transaction. Have a separate business bank account from your personal finances. If you bootstrap your business with your own money, be sure to record these along with every important transaction-both when you put money in and when you take money out.
If your business is successful enough to interest a buyer, you don’t want to delay the process while digging up historical records. A promising buyer may presume you aren’t careful about running your business if you don’t have facts and figures at hand.
Build a team of advisors
When your business shows initial signs of success, you should seek out an accountant and lawyer. These advisors will help protect your business while it grows. They will advise you on payroll, contracts, buying insurance and other important decisions. It pays to hire quality professionals. Over time, their knowledge of your business will pay off. They support your success and form your frontline when problems come up.
Keep track of the performance of the business
Current performance data is valuable for directing business strategy. If you see numbers go down, you can adjust and improve. If you make changes and record the outcome, that information can help you and a buyer. Every business has a different set of key performance indicators (KPIs). Become familiar with how businesses like yours measure their performance.
Examples of KPIs are:
- Market share
- Sales by channel
- Sales by account
- Dollar or unit sales by SKU
- Traffic to your website
- Number of your email subscribers
The basics of making a deal to sell your business
How to get buyers interested in your business
Every buyer wants to uncover a gem that no one else has discovered yet — something exclusive. This is how the best businesses are sold. This is also the way to get the best price for your business.
So…get the word out. Attract buyers who understand your industry and your place in the market. Be visible at conferences, industry events and networking platforms such as LinkedIn. Let people know who you are and how passionate you are about what you do. Share your expertise on panels and contribute to workshops. Talk about lessons learned, how your business is growing, new accounts and plans for expansion. Press coverage is also very helpful.
How to work with a broker who sells businesses
Quality brokers who sell businesses will have their own network of potential buyers. Be aware that some brokers may use your business to create a network. It’s better if the broker has experience in your line of business but not always necessary.
You don’t want anyone unproven to represent your business. Get references from prior clients and speak to them about their experience with the broker.
As part of their work, brokers develop a business memorandum to send out to potentially interested parties. The memorandum includes details on the financial health, market share, talent on the team and other facts that make your business attractive to a buyer.
Broker fee arrangements can include a percentage of the sale price, a monthly retainer, or a combination of the two. Make sure you clearly understand the terms.
What you need to have for due diligence when you’re ready to sell a business
Buyers always confirm the value of your company before they give you a firm offer. Three years of financial records is usually requested. What a buyer is most keen to see are monthly profit and loss statements and a current balance sheet. Getting into the habit of recording these figures is also a great way for you to understand how well your business is doing.
This is why you should consider hiring a professional account or use software such as Quickbooks or one of the alternatives. If you don’t have a certified public accountant (CPA) on your team, you may be asked to perform an audit.
Protect proprietary information
You want control over who knows these details about your business. Here are three steps you can take to protect yourself:
- Confidential Disclosure Agreement (CDA) or Non-Disclosure Agreement (NDA) – Have your broker and buyers agree to sign one of these. There’s little difference between the two. Both obligate the recipient to keep your documents and their contents confidential. Download free templates for a CDA and NDA here.
- Include the words “Proprietary and Confidential” – Adding these to documents that may expose information offers some legal protection.
- Control the sharing of documents – Ask for any originals and any copies made to be returned to you. You want to control who has information about your business at all times. Have your broker check with you before sending anything to anyone.
Common agreements in business sale transactions
A sales and purchase agreement (SPA) is the legal document of your transaction. It describes exactly what you are selling. It will itemize the assets of the business such as: equipment, trademarks, etc. You will also turn over common stock that is issued to every incorporated company. The SPA will record the purchase price. It may also include other conditions that both parties agree to. You never have to accept any terms you don’t want to but the buyer may insist on conditions for the deal to go through.
Here is a list of the most consequential conditions that often come up when you’re negotiating a business sale:
- Buyer holdback – A buyer may ask for a “holdback”. This is an arrangement where the buyer delays paying the seller in full. The reason this is requested is that a holdback, or positive representation of warranty, gives the buyer enough time to observe business operations in action. This is a proven way to verify that the business runs the way you claim it does. When you sign this type of agreement, you allow a buyer to get their money back out of your bank account.
- Personal guarantee – This is a commitment that if you have mis-represented the value of your business in a sales transaction, you will restore the money lost out of personal finances
- Representations and warranties – What you claim about your business will need to be verified by an accredited accountant or CPA. Beyond this, you may be asked to swear in a written contract that what you are sharing about your business is true, to the best of your knowledge. This guarantee gives the buyer legal recourse against fraud.
- Non-compete agreement – This is a promise, for usually 3-5 years, that you will not be going back into a similar business and compete with the buyer.
- Seller financing – Buyers may ask you to kick in some money to complete the deal. If the buyer can’t raise all the money to buy the business, they may arrange to pay part of it to you over time.
Transitioning the business to a buyer
To ease the transfer of a business to a new owner, you may be asked to continue working for the business temporarily. It is critical for the new owner to take over working with the customers, suppliers and employees in a way that inspires confidence. You will likely be essential during this changeover and may be asked to stay on for a while to help.
A buyer may offer you an employment agreement when they can’t raise enough cash to pay the full price. This has the benefit of easing the transition of ownership while helping the buyer finance the takeover. Getting an offer to become an employee has different tax implications than selling the business, so be sure your accountant helps you understand your total net proceeds after all taxes.
If you build a company that inspires new leadership, it is a credit to the vision and hard work of you and your team. This is why selling your business is so rewarding.
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