The process of selling a business takes time and effort. To get the highest value for your business and negotiate the selling process effectively and efficiently, it is important to start the process early.
In this article, we explain how you can prepare to sell your business, including who you need on your team, how to find a buyer, and best practices for navigating negotiations and closure.
Do the prep work
Consider the following issues before you begin the process of selling your business:
- Clarify your reasons for selling: Any buyer will want to know why you’re selling. Be honest. Reasons could include burnout, family issues, financial troubles, retirement, or simply the business was not a good fit for you.
- Legal ramifications: If you are a partner, shareholder, officer, or director of your business, your standing may affect your ability to sell.
- Disclosure: If your business is in trouble or has potential problems, how will you disclose that information to a buyer?
- Timing: To ensure you get the best price possible, think carefully about the best time to sell your business.
- Professional help: Prior to selling, you may need help from an adviser, lawyer, accountant, tax professional, and more. Be sure to line up these resources well ahead of time.
For more information, see Initial considerations when selling your business
Talk to your accountant early
If you're thinking of selling your business, it's likely that your accountant will be one of the first people you turn to for advice.
If you've used an accountant regularly to prepare your tax returns and draw up financial statements, he or she will be well acquainted with the financial shape of your business. Your accountant may also have other clients in similar businesses and will be in a good position to know if your business is attractive to a potential buyer, and can give you ideas on how to make it more attractive.
Prepare financials and other documents
Your accountant will also be essential in drawing up the historical and projected financial statements and other data required to place a proper value on your business. They can also gather and organize any financial data requested by the buyer during the due diligence phase of negotiations.
Before you meet with your accountant, review this checklist:
- Gather tax returns for the past three to four years.
- Pull bank statements.
- Create a list of equipment and inventory that you plan to sell with the business.
- Gather insurance policies, customer and vendor contracts, employment agreements, equipment leases, and any trademarks or patent documentation.
Determine the asking price
If you are a service company with few assets, you may be able to determine your asking price by reviewing your earnings and financial statements, and establishing the value of your business as it exists today.
However, in many cases, it's worth hiring an experienced business appraiser. The value of your business depends on many interrelated factors. If you're to receive the full value of the business but avoid setting the price so high that it drives away all potential buyers, you need the analysis of an expert. Moreover, when buyers question your price during the negotiation process, it helps to be able to point to the precise reasons why your business is so valuable.
An appraisal from a business valuation expert can also prove the value of your company to the IRS, particularly if you are selling or giving it to relatives or other "insiders". If you embark on a gifting program that involves giving some stock to your children each year, you may need to get an annual appraisal for IRS purposes.
Understand the tax implications of a business sale
Depending on how your deal is structured, you may face an enormous tax bill upon the sale of your business, or next to none. The tax implications of the sale depend on how your business is legally structured (such as a corporation or LLC) and whether you sell your business assets or the entity itself.
To take advantage of tax-saving opportunities, plan well in advance of any sale. For more information, read our discussion of the tax aspects of the sale and consult with your own tax expert before you begin serious negotiations with any buyer.
Look for buyers
When finding a buyer, you have many options. Candidates for purchasing your business could include:
- Family members
You could also list your business in trade publications and websites. Alternatively, a business broker can help you reach more buyers, but be sure to check out their background, references, and commission structure first.
Once you’ve identified an interested party, it’s important to action a few things:
- Verify that the buyer pre-qualifies for financing before you disclose any information about your business.
- To ensure your business information is protected, put any agreements in writing, including non-disclosure agreements and confidentiality agreements. Don’t share your selling memorandum with any individual who has not signed these agreements, including your accountant, business broker (who can only disclose information to qualified buyers for the purposes of evaluating the purchase), or other professionals. Ensure your lawyer reviews all agreements.
- Require your broker to agree that any party who's interested, after receiving the general overview of the business, must sign a confidentiality agreement with you before learning any more details.
Negotiate the sale
Once you have an offer or multiple offers, due diligence and negotiations can begin. On the table are terms for the sale price, buyer financing, assets included, plus any training, support, or continued involvement you will provide.
Agree to these terms before you get your lawyer or tax adviser involved. Too soon, and they may get involved in minor details – and at a price. Just ensure you’ve had preliminary discussions with these professionals before you settle on a buyer so you can understand your options and avoid any pitfalls.
Let your buyer know that any preliminary agreement is subject to your attorney’s review and approval. Even if you’ve signed a letter of intent, you can still keep negotiating through your respective lawyers.
Complete the sale and prepare for the closing
Before the deal can be closed you will need to address any conditions of sale, such as your buyer’s financing, verification of your financial statements, business license transfer authorization, and more.
In addition, you will need to review and sign an array of documents, including:
- Purchase and sale agreement
- Escrow agreement
- Security agreement
- Promissory note
- Bill of sale
- Settlement agreement
- Financing statement
- Employment agreement
Check with your state to understand any obligations imposed on you and your buyer, such as notifying creditors, obtaining director and shareholder approval for the sale, and more.
Completion of the sale also involves several final tasks, including:
- Closing your business bank account and credit card(s).
- Canceling or transferring business licenses and permits.
- Notifying your state or local government of the discontinuation of a “doing business as” (DBA) name.
- Canceling business insurance.
- Closing your EIN account with the IRS.
- Notifying your state and county revenue office of the sale of your business (or “out-of-business” notification).
- Dissolving your business entity and filing appropriate documents with your state.
Frequently asked questions for selling a business
Should I sell my small business myself?
To get the highest value for your business and negotiate the selling process effectively and efficiently, it helps to enlist the aid of qualified professionals. Selling your business is not a job you should do alone. Even for a relatively small business, there's a myriad of federal, state, and local regulations and tax issues to consider and important contracts to negotiate.
The process of selling a business can take time and effort. Consider leaving some of the work to experts who've crafted dozens of deals, instead of spending a great deal of your time trying to reinvent the wheel.
There are several team positions that you must fill, although it's possible that the same individual or firm may fill more than one of these:
- Tax expert
- Business broker
- Business appraiser/valuation expert
- Banker or other financier (if third-party funding is needed)
Not all of these positions need to be filled for every small-business sale — much depends on the size and nature of your company.
At a minimum, involve your lawyer and accountant, who may also serve as your tax adviser. Both offer several benefits:
- They can ensure your sales contract is worded correctly. If not, you may fail to get all your money or find yourself exposed to liability claims by the purchaser, creditors, customers, employees, and so on. Even a small sole proprietorship will need a lawyer to look over the sales contract.
- They can oversee the tax consequences of the sale. State laws typically require certain papers to be filed whenever a business sells all or most of its assets. If a partnership, an LLC, or a corporation is involved, these pros can take care of the complexity.
Which attorney should I use to sell my business?
Your lawyer plays a key role in your plans to sell your business, and in drawing up the legal documents used to carry out those plans.
If you have a small business or your attorney is very experienced in all aspects of transition plans, this may very well be a wise course of action.
But before automatically going with the attorney you’re most familiar with, make sure that he or she is familiar with all the legal aspects of selling a business. The sale of a business — whether an outright sale or a merger or acquisition — requires a high level of expertise in the area and time to devote to completing the process.
Consider an attorney who specializes in business transfers or mergers and acquisitions. Most larger law firms have M&A specialists on staff, although these experts don't come cheap. But it's well worth it to get the best legal advice that you can afford. If your deal is too small to interest a high-profile attorney, they might be able to recommend an associate who would be interested.
If you are working with a business broker or M&A agent, ask them to recommend an attorney who's successfully guided other businesses through a sale. In most cases, it's best to hire a lawyer first so he or she can examine the broker's listing agreement before you sign it.
As with any professional, the best way to find a good lawyer is through word of mouth. Ask your current lawyer, accountant, other business owners, or retired owners if they liked the attorney they used. Once you've collected a few names, interview them to see whether they can take on your sale.
Make sure they have the time, the staff and the expertise to do an exceptional job on your behalf. Questions to ask include:
- How much experience they have had in business succession planning and implementation?
- How many other clients they have had that are in the same line of business as you are.?
- What the fee schedule is and exactly what is covered and what are "additional charges"?
Importantly, do you feel comfortable with their knowledge, experience, communication style, and level of integrity?
Note: It's very important that your accountant and your lawyer work well together since both will be instrumental in completing the sale of your business. If they don't communicate frequently, they may end up duplicating some of each other’s work, which means you may have to pay twice. In fact, you may want to use an attorney that your accountant recommends, or vice versa, specifically because you'll know that they respect each other and can cooperate.
Should I use a business broker to sell my company?
You don't need to list your business with a business broker or agent to sell it. You may already have a good idea as to who the likely purchaser of your company would be — perhaps it’s a key employee or a relative. In that case, the marketing power of a broker won't be necessary. Perhaps you’re considering placing ads to see if you can find a buyer without having to pay a broker's commission.
However, if you don't already have a buyer lined up, it's likely that you can benefit greatly from their services: A broker can:
- Bring increased exposure to a large pool of potential buyers. They can contact likely purchasers (including competitors, suppliers, major customers, and investors known to the broker) directly and tell them the key facts about your business, without "naming names" until the contact has shown definite interest.
- Screen interested parties for financial ability and other criteria that you specify, so you won't waste time talking to unqualified buyers.
- Guide you through the process of selling based on experience gained from many similar transactions.
The type of broker you select will largely depend upon the size of your business. Because brokers are compensated based on a percentage of the sales price. If your business is very small, you may find it hard to locate one willing to take on the listing. Instead, you'll have to locate a prospective buyer on your own or sell off your assets as best you can. You may also find a real estate agent who does business brokerage as a sideline and is happy to take on a smaller listing.
As a general rule, business brokers are interested in listing companies valued at around $1 million, although the actual price range varies throughout the country. If your business is in the multi-million range, you may want to hire a mergers and acquisitions advisor, someone who functions as a consultant for both buyers and sellers and whose organization may even have in-house valuation specialists and financing available.
Once you’ve identified a prospective broker, ask them about recent sales they have handled, and names of satisfied clients you can contact. Make sure you follow up on these references.
You'll be expected to sign a listing agreement, which will lay out the fee schedule. Usually, brokers' fees are contingent, meaning that they are paid only when the business is sold. In some cases, the fee will be split between your agent and an agent hired by the buyer, or you may be able to convince the buyer to pay some or all of your broker's fees during price negotiations.
As with any legally binding document, it’s best to run the listing agreement past your attorney before you sign it.