Selling Your Business: An Overview of the Steps To Sell Your Business

Every entrepreneur has a different goal when they start their business. While some may want to keep their business for the long run, others may want to quickly sell their company and move on to their next business project. Eventually, every business owner will make for the exit.

Read on for an overview of the steps involved in selling a business.

Preparing for Your Exit

Traditionally, a business was considered attractive for buyers if it met a few of these criteria:

• It was profitable.
• It made a consistent revenue each quarter/year.
• It had a large market share or prospect base.
• It had a wonderful reputation in the world.
• It had a prosperous future that the buyer can benefit from.
• It had received a long-term & profitable business contract from a customer.

Due to intense competition, not every company will be able to meet these criteria today. Ideally, a buyer checks the future profitability of your business before buying it. So, even if your business is unprofitable now, you may have a buyer who decides to reorganize and possibly sell it to someone else for a profit.

When it comes to getting your business ready for sale, it’s necessary to get all the information about your company ready. The prospective buyer can know this information only by perusing the various documents of your company. This is why the very first thing you should do when you decide to sell your business is get your documents in order. Ensure you have the originals and photocopies of all key business documents for prospective investors and buyers to look through.

But what documents might be needed when trying to sell your business?

• Your business registration certificate
• Business plan updated with details of future prospects for the company
• Building lease or property ownership documents
• Equipment, vehicles, tools & facilities rental/ownership documents
• IP, Patent, Copyright, etc. documentation
• Business insurance policies
• Financial statements for the past 2-3 years
• Profit & loss statements
• Balance sheet
• Cash flow statement
• Business tax returns
• Professional certifications
• Business licenses
• Governmental permits
• Supplier and distributor contracts
• Buyer contracts
• Employment agreements
• Confidentiality agreement for the sale
• Personal financial statement
• Seller financing documents (This is necessary only in certain circumstances. It is important to speak to your potential buyer before sharing this document.)
• Offer to purchase agreement

Getting Your Books In Order

While all of these documents are really important, many buyers only want to see the financial feasibility of the business. So, when collating the above financial documents, it's best if you seek help from a qualified and certified business broker. Additionally, if your books of accounts need to be tidied up, you may want to hire a qualified CPA. Usually, the CPA will do some or all of the below activities when getting your books in order:

1. They’ll transfer all your accounting into a single ledger 

Sometimes, companies have disorganized books of accounts. Either your financial information will be recorded in multiple books, or it will be segregated between physical and digital records. However, such books might create challenges when you’re trying to sell your business. The best way to ensure that all your information appears as it should is to collate them chronologically into a single ledger. Your CPAs team will help you by bringing all of your financial information into one single resource that will be easy for prospective buyers to sift through.

2. They’ll standardize your accounting system

Not every entrepreneur knows how to maintain a proper accounting system. Over time, your experience maintaining books of accounts will have increased and become better. But there will be an obvious difference in your accounting system through the years. This can be a cause for concern for buyers as they may be unsure of the authenticity of your records.

Your CPA will study books of accounts, verify your records, and change all your financial information into the same standardized system.

3. They’ll clean up any mistakes or ambiguities in your financial statements

Business sheets, Profit & Loss (P&L) accounts, and cash flow statements can sometimes have missing information or half-filled accounts. This may only be due to human error, but this can be an alarming sign to prospective buyers. While CPAs will not change the numbers in your books of accounts, they’ll alert you to any ambiguities or mistakes in your financial documents. By working with you, they will ensure your P&L, cash flow statements & balance sheets all look updated, efficient, and profitable.

4. They’ll help you “stage” your financials

You may have heard the term “staging” in relation to real estate open houses, where properties are staged to look their best. This is done so buyers can see how wonderful the property is and envision themselves living there.

Similarly, a staging of your books of accounts refers to highlighting those accounting and financial details which matter to the buyer. It is the process of showing the buyer why purchasing your business is the best choice for them.

Valuing Your Business

One of the core factors that impact the allure of your business is its valuation – both current and future. Once your CPA tidies up your books of accounts and shows you the final figure, you will be able to estimate the potential sale value of your company.

In order to get a more accurate evaluation of your business, it is best to consider the following factors:

1. Company revenue

Check how much revenue your company earns regularly and what the average revenue per year is. Here, the rule of thumb here is to use percentages of the annual sales, inventory, furniture, fixtures and equipment, etc., to derive the asking price for your business.

2. Business asset values

Take into consideration all of your physical and non-physical assets and check how much they are worth in the market. Unless your products and raw materials expire, they can be a profitable component of your business. Your real estate holdings, such as warehouses, production units, etc., will also increase your valuation. So too will any buildings, vehicles and equipment if they are relatively new. Any intangible assets such as IPs, patents, copyrights, permits, licenses, brand reputation, customer patronage, etc., will also be high.

3. SDE or EBITDA

Seller’s Discretionary Earnings (SDE) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) are both two measures that are used to evaluate a business. These measures tell the prospective buyer what the business's earnings are before tax and before expenses. But, the SDE has an additional element of the owner’s salary. Essentially, both these measures tell the prospective buyer how much they would earn if they were to work in your business full time as its owner. The rule of thumb is to check the average SDE of similar businesses.

4. Industry growth & market demand

Apart from financial factors, your industry and market demand will also affect your company’s valuation. For example, since AI (artificial learning), ML (machine learning), and DL (deep learning) are growing fields today, businesses dealing with these technologies will have a very high value. If you want to sell a business that uses or offers AI, ML, or DL, the tremendous industry growth & market demand will automatically increase your valuation.

5. Talent acquisition potential

It is people who make or break a company. And if you can attract the right people, you’ll be able to increase the sale valuation of your business too. Businesses that can attract quality talent have a huge potential for future success and have a higher valuation.

6. Geographical location

If you sell a business that is located in a resource-rich location, then your business has huge potential to succeed and be profitable in the future. These resources can be low-cost labor, premium-quality materials, limited government bureaucracy to do business, technological support, etc.

7. Supplier, distributor & customer contracts

Your existing contracts with suppliers, distributors, and customers – especially if they are lucrative long-term contracts – can be a huge selling point. They can also raise your valuation because you are offering your prospective buyers ready-made and settled business contracts.

8. Valuation of comparable competitors

Your prospective buyers will also check the valuation of comparable businesses in your industry. They’ll consider what sectors they are in, what customers say about those companies, how much demand still exists for these products or services and how lucrative the industry may be going into the future. That will give them a fair idea of how much you may be worth in the future, too.

In addition to doing these evaluations yourself, work with a business broker for further insights. Business brokers and business appraisers have extensive experience valuing businesses, and they’ll be able to give you a fair idea of the sale value you can site for your company.

What if my business is losing money?

Now that we know how to value your company before the sale, another question arises. Can you sell a business that is losing money?

The answer is – Yes, you can.

Usually, small businesses which are in debt choose to do one of three things:

1. Have an asset sale

In this technique, you choose to sell only the company's assets and retain the debts/losses. You then use the proceeds from the sale of the assets – machinery, buildings, patents, etc. – to pay off as much debt as you can.

2. Pay off as much debt as possible before the sale

Pay off most of your debt before you decide to sell your business, so any losses you have don’t scare away potential buyers. If you do choose this approach, remember to clear any liens on assets that you plan to use for your asset sale arrangement.

3. Create a contract where the buyer assumes the debt

If the debts aren’t too high and your buyer is willing to do so, you can have a sale contract where the buyer assumes your debts. But, in such contracts, typically, the seller will still be the guarantor for the debts. So, if the buyer is unable to pay off these losses, you may still need to bear them in the future.

Engaging a Business Broker

Selling a business can be a challenging task, especially as you are focused on running your business and maintaining its value. This is where it helps to hire an experienced broker to handle the marketing, valuation and sale of the business.

While you can certainly sell a relatively small business on your own, there are several advantages to using a brokers, especially when big money is at stake.

1. Brokers have experience working with multiple business owners and buyers

Brokers are trained in buying and selling businesses of all sizes and across industries. They have knowledge of the best methods to promote a business and attract a qualified buyer. This incredible expertise can help you quicken the sale process and ensure you get the best value possible.

2. They can help you estimate the value of your business accurately

While some brokers know how to evaluate businesses, others work with appraisers to arrive at a business valuation. They use numerous valuation methods and techniques to arrive at the best price that works in favor of both the buyer and the seller. They can also advise you about what changes need to be made to improve the value of your business. So, if you want to know how much to sell your business for, speak to a broker today.

3. Brokers have the resources needed to promote your business and find potential clients

Business brokers specialize in buying and selling businesses. They have incredible reach in the market. They have the monetary resources, technological support and people needed to get the word out about a business that is going on sale. Additionally, since they have experience selling businesses, promoting the sale, qualifying buyers, negotiating price and deal structure, and managing legal and compliance paperwork.

4. They know how to put together a compelling deal

Brokers are extremely clever salespeople who know exactly how to position and promote a business to even reticent buyers. They’ll know how to make your business seem alluring, inviting, and profitable.

Plus, brokers have a strict confidentiality clause that can protect your identity during the sale. This will ensure that the sale of your business is kept under wraps and people who aren’t party to the sale are not aware of it.

5. Brokers empower you to focus on your business during the sale

Finally, brokers perform all the on-ground and in-office work that goes behind making a business sale successful. These tasks can be drawn-out and time-consuming. By yourself, you may find it difficult to discharge all these duties. It may also take your focus away from your business and create more problems in day-to-day operations.

Brokers will be able to take over these tasks for you, allowing you to focus on running your business.

At BizQuest, you can quickly list your business and access our expansive directory of highly experienced brokers who can help you sell your business. We have over 90,000 registered buyers worldwide, and we receive over 1.4 million monthly visits on our website. By listing your business with us, you’ll be giving your company the visibility it needs to initiate a quick and profitable sale.

Due Diligence

The final stage of selling your business is due diligence. Once you have a prospective buyer on board, they will initiate due diligence of your business to make sure everything is in order. This due diligence process when you sell a business includes:

1. Financial due diligence
To check if all your financial and accounting records are in order.

2. Legal due diligence
To ensure that your patents, IPs, copyrights, permits, etc., are all legally acquired. And also to check if your business is not doing anything outside the law.

3. Employee due diligence
To learn about employee-employer relations, the potential for union trouble, pending employee lawsuits and any employee accident insurance claims that might be present.

4. Inventory due diligence
To check the quality and longevity of your inventory – raw materials, semi-finished goods & finished products. To understand any risk posed to the inventory, genuineness of the inventory, review inventory order contracts and identify any kickbacks.

5. Brand reputation due diligence
To understand the customer sentiment towards the brand. To calculate the leverage and profitability that the brand name will bring the buyer.

6. Contract due diligence
To review any contracts with suppliers, manufacturers, distributors, wholesalers, retailers, 3PLs, media, PR houses, etc. To ensure the legality of these contracts and any potential kickbacks.

7. Customer due diligence
To understand the current customer base. To evaluate the growth potential of this target market and any new markets that the buyer will be able to sell to post-purchase.

8. Company culture due diligence
To check if the company’s existing culture is aligned with the buyer’s business approach and perspective.

9. Non-compete agreement due diligence
To review the terms of the non-compete agreement and ensure that the future business of the seller does not interfere with the business of the newly purchased business.

10. Intellectual property due diligence
Check if all your IP’s are in order, and they don’t suffer from any contention from another party.

For more detail, see our overview of Due Diligence When Buying a Business.

Listing your Business for Sale on BizQuest

BizQuest is a premier business listing platform with extensive experience empowering entrepreneurs to sell their business. We have a massive directory of brokers, where you can find and hire a broker to help sell your business.

Comfortable selling your business without a broker? Our marketplace brings together sellers and buyers from all over the world. You’ll find the buyer you’re looking for listed with us. If you need any help, feel free to contact BizQuest.