Selling A Small Business-12 Crucial Steps
Selling A Small Business—12 Crucial Steps
By Peter Siegel, MBA
Only 30 percent of all businesses for sale that are put on the market are sold—a surprising statistic to most owners, agents, and business brokers trying to sell a business. If however you follow the steps and tips below your chances of selling dramatically increases.
Have All Records Ready Before You Go To Market
Have these items ready before the business goes on the market to be sold: The last three years of federal tax returns for the business being sold, the last three years of financials (profit & loss statement, balance sheet), the last three years of monthly bank statements, copy of current lease, list of all equipment being sold with the business, etc. Many parties during the selling process will need this info—serious business buyers, your landlord for a new lease for the new buyer, lenders (for a possible loan/financing for the buyer, note buyback firm (in case you want to sell the note for cash after the business sells).
Also make sure you know what the correct Adjusted Net income has been for the last three years. Serious business buyers will want to know this. Adjusted Net income is: Net Income after Owners Salary, before Depreciation and other Interest Expenses, plus Other Business Expenses Written Off (Deducted) That May Not Necessarily Be Business Expenses To The New Owner Of The Business. Many times referred to as EBIDTA.
Have a Professional Business Valuation Performed
Getting a 3rd party professional business appraisal/valuation is important and critical for the process. 70% of all businesses NEVER SELL usually due to too high of price (and/or a bad deal structure) placed on the business being sold. Getting a professional 3rd party valuation is well worth the expense and will be utilized by many parties during the selling process: possible business buyers, lender/financing companies for the buyer, and others.
Keep a Folder of All Info/Contacts
Keep a folder of all contacts, notes, and paperwork for your business for sale transaction. Keep a log of all buyers who contact you—get their phone numbers, email address and keep notes about them (this will come in handy down the line, trust me). You want to make sure you have backup buyers in case your first choice drops out during the selling process. Keep all escrow info, purchase agreements, signed non-disclosure/confidentiality forms, contact phones of CPAs, Attorneys, etc. and other pertinent data/info in this folder.
Write up a Comprehensive Summary of the Business (Your Broker Will do this)
Buyers are going to need to know many details about the business being sold. Instead of having to re-explain to many buyers about the business (and probably forgetting many important facts) make a one page summary of the business being sold. Include: History of the business, date established, number of employees, important attributes about the business and surrounding area, what you would recommend to a new buyer to increase business once they take over, what geographic area the business covers, the competition, the reason for selling, how much training will be provided after the sale, etc.
Confidentiality Agreements are Important
Have all potential business buyers sign and date a Non-Disclosure/Confidentiality Agreement before giving out any info. Make sure potential buyers understand how important it is to keep the sale of the business confidential and that there are legal ramifications if they don’t.
Get Controlled Maximum Exposure on the Sale of the Business
One of the most important items is to make sure that many, many buyers (ones that are qualified to buy) see the business is for sale. Expect to spend $400-$2000 for advertising and marketing to adequately get the word out to the right business buyers. Yes it does only take one buyer to buy the business, but you want to make sure you have multiple buyers (and backups if possible) ready to go.
Get the Business you are Selling Pre-Qualified For Financing
You are probably saying “that is the buyers responsibility.” You couldn’t be more wrong. This is a critical step in ensuring that possible buyers can get financing in the first place to buy the business. This is highly important, since if a buyer can’t get financing from a lending institution that means the owner will have to take back a note, or sell the note after it sells for a discount etc. By doing this step early you will know what some very important options will be for potential business buyers without a lot of time being wasted. Remember: TIME KILLS DEALS. Get this step done before you go to market.
Keep the Negotiating & Communications Moving Forward
Make sure when you are negotiating the contract, allocation of purchase price, new or restructured lease, etc. always be moving forward. Don’t let any situation sit too long–it will most likely kill the deal.
Get the Signed Purchase Agreement into Escrow
Get the signed purchase agreement into escrow immediately and sign off any contingencies quickly. Make sure you go through the Allocation of Purchase Price in the beginning of the escrow process not at the end which happens most of the time.
Due Diligence by the Buyer Should Not Last Forever
Due diligence by the buyer should only last 4-14 days. Since you are going to be organized and ready with all important info and documents, this is all the time any competent business buyer (and CPA for the buyer) should need to investigate the business for sale. You do not want the business off the market for a prolonged period so be firm about the length of time for Due Diligence. Get it in writing (purchase agreement) and make sure all parties to the transaction stay with the schedule.
The Business Isn’t Sold Until you have the Check in Hand
Always continue to collect names of business buyers and their phone numbers etc. even if you are in escrow (50% of all deals fall out for one reason or another) You want to make sure you have a successful deal and a business buyer that is going to complete the deal. Try to have 2-3 potential business buyer back-ups who are willing to take the buyers place within the escrow should the current business buyer drop out.
Keep a Positive Attitude—It Will Happen
Keep calm and a have a positive attitude. By following the above steps you will definitely find a qualified buyer for your business. Things happen pretty quickly when selling a business. If you are prepared, follow through with all buyers professionally and keep up on the selling process, you will be successful.
Peter Siegel, MBA, is a SCORE counselor and founder of USABizMart.com and Business for Sale Financing. He is a consultant and author on buying a business, selling a business and business purchase financing, and hosts workshops on these topics as well. He has written three books and currently writes a syndicated small business blog on these topics.
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