Selling a small business can be a complex process, it’s dependent on various factors such as your personal goals and the state of your company, these factors will influence your deal strategy, decision-making processes, and the outcome of the transaction. Most of the time it all boils down to how fast you want to sell and how much money you are ready to spend. The conventional method of selling a business is hiring a broker, attorney, and accountant to help you prepare the company for sale. This method has high costs associated with it and in some cases, it can take 1-2 years to prepare the company for sale, and then another few years to find a buyer. Take into account that only 20-30% of listed companies end up selling. 

Micro private equity and family offices usually don’t consider acquiring companies that are smaller than $2M in EBITDA, this decreases the number of potential buyers and limits it mostly to competitors, entrepreneurs, and small investment firms.

In this article, we will examine some of the considerations a small business owner can have and the actions you need to take to sell your company successfully and achieve your exit goals to the fullest.

1) To sell or not to sell 

You decide to sell your business. What is the reason – This is the first question a potential buyer would ask. Owners oftentimes sell their businesses because they are ready to retire, in other instances, they deal with shareholders’ conflict, illness, or just have a lack of interest. Regardless of your particular situation, it’s important that you are clear about why you are selling the business and that you prepare yourself mentally for the exit. Take into account that the sale process takes time and it will require you to be actively involved and help the buyer conduct their due diligence.

2) Business valuation

Next, you’ll want to determine the worth of your company This will help you understand how much you can ask for, position you better in front of a buyer, and it can be used as a yardstick for your asking price.

Market standards, where there is nothing right or wrong, most commonly buyers are valuing companies based on a multiple of the EBITDA or SDE (Seller’s Discretionary Earnings), The multiple is determined by the average  EBITDA multiples in your industry and combines other factors such as market stability, location, current customer base, recurring vs non-recurring income, employee base, reputation with customers and suppliers, and the risks involved with change in management. Such aspects, among many others, can increase or decrease the offered price for your company. For an owner to sell his business, he must make sense of all these issues and understand the buyer’s concerns.

3) Timeframe 

Determine when you would like to exit and prepare for the sale as soon as possible, preferably a few years in advance. This will help you to improve your financial profile, organizational structure, and customer base to make your business more profitable and attractive. Such improvements will keep the business running smoothly and will make it easier for a buyer to transition. 

If you are in a hurry to sell and don’t have the time to prepare, working with a broker may be an issue for you as brokers usually ask for extensive documentation to qualify the business and prepare a CIM (Confidential Information Memorandum), this is a detailed document that is meant to be sent to potential buyers, it can be helpful, but at the same time, it usually takes months to complete. The other option, in this case, is selling your business directly to an enthusiastic buyer or to a professional investment firm, it will require more involvement from your side, however, you can mitigate some of that by hiring an accountant and a corporate lawyer to help you ensure the best outcome.

4) Document Preparation

Gather your profit & loss statements, balance sheets, and tax returns dating back 3-5 years and review them with an accountant, it might be helpful to supplement them with the company’s bank statements as well. In addition, create a list of equipment being sold with the business and lists of supplies, customers, contracts, and employees. Make copies of these documents and upload them into the cloud for easy sharing and access.

Your information package should also be providing a summary describing how the business is conducted and/or an up-to-date operating manual. Any troublesome business areas or equipment that is broken or run down should be fixed or replaced prior to sale.

As mentioned earlier in this article, if you are in a hurry to sell your company, you can work on the deal with a professional buyer such as an investment firm, private equity, or family office and take advantage of their experience and ability to advise you on the specific documents that they need to conduct full due diligence on your company.

5) Finding a buyer 

When it comes to finding a buyer, there are 3 main options.
Businesses-for-sale websites – There are countless websites that you can use to list your company for sale, it is a great tool that many buyers use to identify potential sellers. Keep in mind, that very few buyers are capable to complete a transaction, the difficult part for you will be to separate serious buyers from those who are calling out of curiosity. 

Business brokers – We have discussed some of the characteristics of business brokers earlier in the article, in summary, business brokers can guide you through the selling process, help you prepare the company, and more importantly, help you prepare mentally and emotionally. It can be a great option, just keep in mind that it usually takes quite a long time and has costs associated with it, such as a retainer and a brokerage fee (a percentage of the sale price).

Entrepreneurs and professional investment firms – There are many acquisition entrepreneurs and investment firms out there, usually they have the required experience and resources to complete an acquisition quickly, it is important that you find one that shares your values and culture. Conduct some preliminary research on the firm you’re interested in and make sure your company meets their investment criteria, in most cases, it will be well-defined on the firm’s website. Once you have completed your research and want to move forward, contact someone at the firm and provide them with precise details of your company, use this opportunity to get to know them better, their feedback will give you an excellent indicator of how it will be to work with that firm in the future.

6) Deal structure & closing 

If you have done all the preparation steps that we have listed earlier, you will have a reason for the sale, a valid valuation of the business, a timeframe that you are comfortable with, the documentation that is required for the sale, and you have identified a few potential buyers. 

From here, choose one potential buyer and sign with them a letter of intent (LOI), this document usually includes a no-shop clause that prevailing you from negotiating with other potential buyers for a specific period of time, usually between 90-120 days. The LOI outlines the deal structure and includes the purchase price, payment schedule, seller financing, earnout, and other areas of the deal, after signing, the potential buyer begins his due diligence process. If the buyer doesn’t find major irregularities between the information that he received before the LOI and during his legal and financial due diligence the parties can move to the purchase agreement.

7) Financial management 

Make sure you wait a few months before spending the profits from the sale of your business. Develop a financial plan to outline your goals, and consider the effects of sudden wealth on your taxes. Consult a financial professional to determine how you want to invest the proceeds and focus on long-term benefits, such as paying off debt and building a retirement fund.