Maybe your end game has always been focused on selling your business. Or is the pace of running a business becoming too much, and you’re ready to slow down and retire? Perhaps you have a new business idea and you want to sell your business to pursue (and finance) that dream. Whatever your reason for selling your business, your timing is spot-on. According to BizBuySell, an online marketplace for small business buyers and sellers, small businesses are currently selling for record-breaking prices.
BizBuySell surveyed 2,300 small business sellers and future business buyers and found sellers can sell for more money because buyers know the cash flow of the average business for sale is on the rise. Most of the business owners who were selling their businesses started their companies from scratch (64 percent) and have owned their businesses for more than 10 years (38 percent).
You don’t have to have a big business to successfully sell it. Most of the survey respondents who are selling their businesses have five or fewer employees. As you might expect, small business sellers are predominantly over age 50, while the majority of those seeking to buy a business is under 50 years old.
Steps to Selling Your Business
If you’ve never sold a business before, it’s important to be sure you know what to expect when it comes to your business’s legal processes, finances, its marketability and the life transition you’ll go through after the sale. According to the BizBuySell survey, the number-one concern for business buyers is finding the right business (58 percent) and that means finding a perfect fit. As a business seller, you also want a perfect fit—that is, an owner who will pay you the right price and buy your business for the right reasons. If you have employees, you also have their concerns and livelihoods to think about.
Before putting your business on the market, you need to get it ready to sell. Here are four important steps for selling your business.
1. Legalities: Are Your Ducks in a Row?
If your business is structured as a sole proprietorship or partnership, you are selling the assets of the company. The profit from the sale of your business will flow through into your personal tax return as the profits from your business did in the past.
If your company is structured as a corporation or LLC, you’ll need to make sure you’ve kept the business in compliance with all legal matters and have the documentation ready for inspection. For example, corporations are required to hold annual shareholders and directors’ meetings and keep accurate minutes on each meeting and decision. LLCs are not necessarily legally required to have meetings, but it’s a good practice most LLC members embrace, including maintaining minute books. The documentation helps maintain proof the company is a separate entity from the owners and can take on any liabilities.
Minute books should document important decisions made by the Board or members such as agreements, contracts, loans, equipment and insurance purchases, profit sharing and more. Keeping good records improves your reputation and your attractiveness to potential buyers.
Your corporation or LLC’s operating agreement should include the procedures for what happens to the business in case of dissolution or sale, along with what happens to the shares and the members/shareholders. In some states, you may have to dissolve the LLC if your operating agreement does not provide for ownership transfers. There are two ways you can choose to sell the company: through the sale of assets or common stock. In an asset sale, the seller remains as the legal owner of the entity. The buyer purchases the assets such as equipment, licenses, customer lists, and inventory. In most cases, the seller retains its long-term debt obligations, pays the debt out of the profits from the asset sale and then dissolves the entity. A stock transfer means selling the entire entity including all assets and liabilities.
2. Finances: A Numbers Game
Most people think you need to start with a business valuation, but your prep work actually starts before you search for an appraiser. Talk to your accountant about your plans to sell your business and have him or her go over all your financials so you have the most up-to-date information.
Get the following financial documents in order:
- Current financial statements (Income statement, balance sheet, and cash flow statement)
- Statement of retained earnings
- Past financial statements
- Financial projections for 3, 5 and 10 years out
You’ll need to have these documents on hand to present to prospective buyers. Without these statements, buyers will move on to other sellers who are better prepared.
If your business’s finances aren’t good as they could be, talk to your accountant about ways to make your business look more attractive to buyers. Business buyers want to see evidence of solid cash flow on steady footing, not precarious ups and downs.
Your business will appeal to more buyers if it is debt-free. So, even if you’re a few years away from selling, take steps now to pay down debt. If you have investors, can you buy them out? The “cleaner” of encumbrances your business is, the more interested buyers will be. If you do have debt, look for better rates on fixed asset financing. Having debt is not a deal breaker by any means, but it will lower your business valuation and may cause buyers to offer less than your asking price.
3. Marketability: Curb Appeal
Because your business is your “baby,” you may be too close to it and too emotionally invested to see the wear and tear, the outdated systems, or the client rut preventing business growth. Just as with getting your home ready to put on the market, selling your business requires sprucing it up inside and out.
However, it takes more than a new coat of paint to get top dollar for your business. In addition to enhancing its curb appeal, you need to ensure all internal systems are running smoothly. Are your technology and equipment up-to-date? How strong is your business brand? Buyers want to know how you are generating new sales and what your lead-generating strategy is. How diversified is your business? If you rely on a few key clients for most of your sales, that can be a red flag to buyers, indicating your business isn’t financially stable since those clients could leave. What expertise do your employees have, and how likely are they to stay with the business after it has a new owner? Do you have long-term contracts? Some buyers might consider those an advantage (less for them to worry about), while others would rather form their own relationships with outside parties.
If you’ve been running the business as a sole proprietorship or partnership, you might consider reorganizing as a corporation to take advantage of the new tax laws making corporate rates lower.
Just like a real estate agent can help you stage your house for sale, an unbiased third-party can suggest ways to make your business more appealing to potential buyers. Talk to a counselor or mentor at one of the SCORE offices, Small Business Development Centers (SBDCs) or SBA district offices across the country to get personalized advice. You can also search online for free webinars and guides on selling a business.
4. Transition: Letting Go
Before you can move on, you may need to dissolve your corporate entity or business structure. This is a multi-step process. In fact, if your business is a corporation or you’ve formed an LLC, you must dissolve your business entity. Get started by having a meeting with your business partners or Board of Directors and holding a vote. Be sure to record this vote in your meeting minutes. Other things to note, according to CorpNet:
- If you issued shares for your corporation, you need ⅔ of the voting shares to agree on the dissolution.
- If no shares were issued, it’s the Board of Directors who must agree on dissolution.
- If you run an LLC, check the dissolution requirements in your state’s Limited Liability Company Act.
Once that’s done, no matter how excited you are about selling your business and moving onto the next phase of your life, transitions can be unexpectedly tough. You may go through more emotional ups and downs than you expect once you close the sale. (Just ask your friends and family: They probably have a better understanding of how hard it will be for you to let the business go.)
When Nellie Akalp, founder of CorpNet, sold her first business, she experienced feelings of seller’s remorse, betrayal and the isolation of no longer being a part of the company’s decision makers. Even if you are ready to sell your business, you might still suffer feelings of loss. MRI scans from a 2017 study by the University of Helsinki showed entrepreneurs are attached to their companies in the same way parents are to their children.
If your exit strategy includes starting a new business, then you may think burying yourself in work again will make the “mourning period” easier to handle. But starting a new business is so time-consuming that jumping right into another venture without taking time to refocus could hurt your future business’s chances of success.
Instead, give yourself some downtime in between businesses to adjust to your new reality. Spend time with your family and friends. Get a good night’s sleep for a change. Do the things you haven’t been able to do as a busy business owner, such as taking a vacation, exercising regularly, or doing volunteer work.
By giving yourself time to properly process the transition from one business to another — or from business ownership to retirement—you will be better able to savor your new life.