How to Sell Your Small Business

Are you thinking about selling your small business? The process can be stressful and complicated, but you can make it easier by asking — and answering — a few key questions before placing your company on the market.

Is Your Business Sellable?

First, you want to make sure that your business is sellable. Ask this question: If you were not involved in the day-to-day operations, could your business survive?

A sole proprietorship (in which you are the only person providing a service) probably won’t be attractive to a buyer. But, if you aren’t in a rush to sell, you could hire a few employees or contractors to provide services to your clients and transform yourself into a manager. Once you’re overseeing employees and a healthy client base, your small company will likely be more attractive to a buyer.

What Is Your Business Worth?

The person who’s least likely to know the true value of a business is its owner. You’ve built the company from nothing into something — and it can be emotionally difficult to avoid putting a premium on your accomplishment. Yes, you can estimate its worth by using an online calculator and traditional valuation metrics, but before you put your business on the market, ask an objective expert to evaluate it for you.

Note that the estimated value does not mean the business will sell for that amount. After you determine the value, decide whether market conditions are optimal for selling your company at this time or whether you need to put more work into your offer before presenting it to potential buyers.

Are You Ready for Showings?

Selling a business is a lot like selling a home. What do potential buyers want to see when they walk into your business? Whatever that is, make sure they see it. If equipment is broken, fix it. If the building hasn’t had a professional cleaning in a while, make the call. If the shelves look bare, fill them with inventory.

Where selling a business differs from selling a home is the paperwork. Have these documents ready to show a buyer upon request:

  • Balance sheets and profit & loss statements from the past three years
  • Year-to-date profit & loss statement and current balance sheet
  • Tax returns from the past three years
  • List of all business-owned equipment and inventory
  • Lease agreement or commercial property appraisal

Other items you will need as a potential buyer performs due diligence will likely include insurance policies, employee agreements, patents held, customer contracts, bank statements, and any paperwork dealing with debts the business owes.

Is Your Buyer Qualified?

You might rely on a site like BizBuySell.com to advertise the sale of your business, or you may find a prospect through word of mouth. Either way, before handing over any sensitive business documents, make sure the interested party has the capacity to buy.

Ask the potential buyer to provide some or all of the following:

  • Contact information
  • Previous business experience, including ownership
  • Education and professional certifications
  • Proof of investment funds and their source
  • Time frame and why they’re interested in your business
  • A signed nondisclosure agreement

Do You Have Legal Help?

Let an attorney prepare the purchase agreement. If the buyer’s counsel prepares it, ask yours to review the document. Preferably, the attorney should have experience with commercial purchase agreements.

The Small Business Administration advises that, among other items, a purchase agreement should include an exhaustive list of assets being sold, along with the purchase price, payment terms, warranties, all fees and who is responsible for paying them, and a closing date. It should also stipulate who will run the business after the sale. (To get a better understanding of the contents of the agreement, consider purchasing a sample agreement online.)

Are You Sure You’re Ready?

Building a successful small business is far more than a full-time commitment. You’ve likely spent your regular work hours, plus most of your free time, growing the operation, perhaps over the course of many years. Once you sell, what will you do next?

Is your idea of a perfect post-entrepreneurial life to travel, relax at home, or start another business? Just as you did when you started your business, have a plan for what’s next. This will cut down on seller’s remorse.

About Tim Parker

Tim Parker is the owner of ECS, LLC, a company specializing in financial and small business content. His writing has appeared in many of the top financial blogs including Investopedia, Yahoo! Finance, Benzinga, Business Insider, and Forbes. Find him on Twitter @expositioncreat and Breaking Finance News.com
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4 comments
SMM
SMM

A great ebook that helped us - not to mention the firm that wrote it ( not a shameless plug ; ) is found here: http://www.rina.com/seven-steps-to/Increase-the-Value-of-Your-Business-B.php

I think from an accounting perspective it is imperative to ensure that you business valuation is in top notch shape before you start negotiating the sales price of your business. You have to be able to show the tangible and the intangible value.



bvexpert
bvexpert

"A sole proprietorship (in which you are the only person providing a service) probably won’t be attractive to a buyer. But, if you aren’t in a rush to sell, you could hire a few employees or contractors to provide services to your clients and transform yourself into a manager. Once you’re overseeing employees and a healthy client base, your small company will likely be more attractive to a buyer." 

 

The paragraph above is filled with bad advice. First, sole proprietorships sell all the time because many buyers are looking for a job as well as a business. Second, the primary driver of business value is earnings. Immediately after hiring an employee your earnings are reduced significantly and anyone who has been in business will tell you that it takes a long time to increase sales enough to just cover the salary of the new employee. If increasing sales were that easy, you probably would have done it by now.

 

So by following this advice you will immediately decrease earnings and value significantly, and will need to significantly increase sales over a long time period just to get back to where you were to start. Great advice!       

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