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Selling your business may feel like an overwhelming challenge. You can do it by focusing on three main requirements:
- Determine the value of the business.
- Collect documentation that supports that value.
- Prepare a statement that explains the reason you want to sell.
How Do I Prepare to Sell My Business?
The timing of the sale is tied to the preparation that goes into the sale. This all starts with a comprehensive checklist, which can lead to success as you take steps to sell a business.
You don’t want to hit the market with a price that is too high or too low. If you’ve listed the business for sale and there’s no interest, that’s a sign your value is too high.
You want to avoid having people drive by or view your business before you’re fully prepared. Additionally, you don’t want to get caught up answering questions about the business while you’re trying to manage it.
Here are a couple of prep steps for your checklist:
- Enhance your property. This involves more than just improving curb appeal with cosmetic upgrades to the exterior; it also includes refreshing the interior.
- Get a professional business valuation. If you come on the market with a price that’s too high, it’ll look like a fire sale when you start cutting the price. Potential buyers who arrive on the scene late might wonder why it’s been on the market so long.
- Gather documentation that proves the asking price is reasonable. You’ll need things like financial statements and lease agreements. (See below for a complete list.)
- Use a virtual data room. A data room is an online repository where you can store documents. Information can be grouped by topic in the data room. There are many VDR providers.
- Choose the time when you want to sell.
- Set a system to prequalify buyers. Serious buyers are going to want to do due diligence and see documentation. You don’t want to provide financial information about your company to tire kickers.
To learn more, download BizBuySell’s Guide to Selling your Small Business.
Selling a Business Checklist: Important Considerations
This checklist covers everything you need to know to sell a business.
Employ a Team of Professional Advisors to Start the Business Sale Process
Each member of your sales team is important. Each can provide information and assistance to prospective buyers.
What’s more, a great team can free you to run the business. Assembling a team is step one of the checklist for a reason – it’s directly tied to success.
Accountant
If you’re a sole proprietor, you may do your own financial recordkeeping. Hiring an accountant as part of the sale is important. Financial information must be provided in a professional manner. Any outstanding accounts receivable should be brought up to date.
Attorney for Legal Advice
Most attorneys specialize in certain types of law. There are attorneys that specialize in commercial sales. They know the issues that can throw a wrench in the works, and they know how to streamline the process.
Business Broker
Unless you’re selling a business to a family or an employee, you need a business broker. Yes, you’ll have to pay a commission. If the sale is less than $1 million, the commission will be about 10%. The business broker is a real estate and commercial specialist, on top of trends and in the know about people who want to buy or sell a business.
Valuation Expert to Determine Business Value
A professional valuation expert adds credibility to your price. The price is not just your opinion, it’s an objective appraisal from a person that knows the price of businesses for sale. That type of appraisal is respected by buyers.
Clarify Your Reasons for Selling
Obviously, you don’t want to say things like, “I’m just too overworked” or “I made a mistake buying in this location.”
You should develop a written statement about the reasons behind the sale:
- Retirement
- Relationship with partners/investors not working
- Owner illness or illness in the family
- The owner needs to move
Review Business Licenses, Contracts, and Agreements
You need to be proactive in organizing this information.
Lease agreements are straightforward to investigate, as they have clear start and end dates. Determine whether you need to create lease transfer agreements. Addressing license and contract agreements can consume significant time when a sale is in progress. Here are some examples:
- Is the business a corporation? If so, it may need to be dissolved as part of the sale.
- Did the business’s bylaws clearly outline the Termination Rules at the time of its establishment? It is essential to adhere to those rules.
- Are there multiple owners? All must sign off on a sale.
- Are you selling the business name?
- Are there licensing agreements? These can include things like software use agreements and general business operation licensing.
Make Sure You Have All the Documents You Need
This step can be daunting. It’s a lot of paperwork. However, once it is organized, it can be presented as a packet of information to pre-approved buyers. A packet can help a deal move forward faster.
Business Documents
These are the nuts and bolts documents that detail how businesses operate:
- Equipment and facility maintenance agreements can include vehicles, factory machines, computers, and copiers.
- Written business plan – describes the business from start to present. The plan should include a description of business operations, plus plans for the future.
- Marketing plan – How the business is promoted
- Existing customer and supplier contracts – If there are raw materials needed to make your product, you need to prove that there are no problems with supply, for example. Also, list any customers who have contracted for long-term goods or services.
- Product price list – If needed. If your business is producing a product or products as assets for many years, include price lists from the past showing any increases.
Tax Documents
A person or entity that is buying a business will perform due diligence – gathering all the information they need. Tax documents, usually federal and state for 3 years, along with profit and loss statements, are a definite requirement to provide when selling a business.
Here are a few more:
Seller’s Discretionary Earnings
These are expenses that aren’t essential. A new owner may opt not to spend any money on these items, or spend less money. As part of your prep checklist, you/your accountant can go back into tax returns and move these, which will increase the value of the bottom line.
Examples:
- Travel expenses
- Vehicle – If the owner had a company car.
- Entertainment of customers
- Marketing campaigns, advertising
- Perks for workers
Financial Statements
These statements work as an annex to the tax return information and are part of due diligence. The buyer needs to know if credit agreements will be honored. The buyer also needs to know if creditors will be paid off as part of the sale.
- Credit agreements – for example, a supplier may extend credit for raw materials.
- Creditors – this can include information about loans for business equipment, physical property, software, and vehicles. It can include leases for property and equipment.
- Accounts Receivable – This information helps the buyer understand the cash flow of the business. The buyer can learn how much money is currently outstanding.
Intellectual Property Documents
These documents are the dot the I’s and cross the T’s items, and it’s extremely important that they are correctly executed. Intellectual property documentation is an integral part of the sales process.
This is where a commercial and business sales attorney experienced in the intellectual property documentation requirements is well worth the cost.
Government Notifications
The secretary of state must be notified about the sale of a business, including changes in LLC ownership.
The IRS and the Department of Revenue must be updated.
Legal Documents
- Employment contracts. This one is so important. Does the new owner have to keep existing workers?
- The physical legal description of business property – including property boundaries and deed description.
- List of any stockholders and shareholders
- Was the business owner/owners ever audited by the IRS? Include that information and the results.
- Are there any pending lawsuits? These are liabilities, but you can’t hide them.
- Provide documentation about the business registration and any needed permits and licenses.
Review Insurance Requirements
Make a list of all insurance policies (and policy numbers) connected to the business. Review the coverage time frames.
Some buyers could opt to retain the same insurance carrier or carriers. You’ll be responsible for canceling coverages that are no longer needed.
If a closing date has been scheduled, don’t call to set up the cancellation for that date. Many things can happen to change the date, and you don’t want to be left without coverage.
Create a List of Business Assets and Gather the Paperwork
Many business assets are visible. There is an office, office equipment, a warehouse or factory, a fleet of vehicles, and more.
But there are also financial aspects to the business that aren’t seen. Those are intangible assets. When you’re listing assets, you’ll also want to include documentation about intangible assets:
- Intellectual property – Do you have trademarks or logos, patents, or licensing agreements?
- Customers – How many loyal customers does your business have?
- Business Name Brand – How long has your business existed under a name? Make sure to let a buyer know about the strength of the business’s reputation.
Create a Complete Inventory List
An inventory list is important so that both you and the buyer know exactly what items are part of the business. This can include the obvious list of furniture and office/factory equipment, and raw materials and product inventory. These are all business assets.
Review Company Rules and Regulations
There are two main areas that a prospective buyer will want to know everything about: employee benefit plans, and the employee handbook.
Benefit plans include information about health insurance, retirement accounts, and possibly earned bonuses for workers.
The employee handbook spells out a code of conduct for workers. It also defines requirements for sick days and vacation time.
Discuss Supplier Contracts with the Potential Buyer
Many businesses have contracts with companies that provide either goods or services to them. For example, a business may contract with a cleaning company for service, or contract with a machine shop for parts.
Must these contracts be honored by the buyer? That requirement may be spelled out in the existing contracts. The contracts may have end dates. But the buyer may want to proactively extend a contract.
Discuss Methods of Waste Disposal with the New Owner
If a company may deal with hazardous chemicals or materials. It may produce scrap metal or plastic. It may generate large amounts of waste paper or cardboard. Do employees recycle paper and plastic?
What’s the plan for disposing of all waste produced by the business? The business should already have an established waste disposal system in place.
Finding out the business’s methods of waste disposal is part of due diligence by the buyer. Both you and the buyer should discuss this as part of the sales process.
Prepare for an Environmental Audit of the Business
An environmental auditor is trained to review a business for compliance with federal, state, and local environmental guidelines. Only a licensed environmental auditor can do this step.
Here are some of the things an environmental auditor will review:
- Does the business have environmental permits? Are they up to date or due for renewal?
- Has the business been in compliance with all environmental requirements?
- If not, are there any remediation orders or is remediation ongoing? Government remediation orders are liabilities, but not a deal-breaker if they’ve been addressed and preventative actions are taken.
Share Details about your Business Software
Business software keeps things running smoothly. As part of due diligence, the buyer will want details.
Look at the Security of Information and Technology Systems
Does the business have a cybersecurity staff? Antivirus programs? Are there built-in software updates, and regular backup of data? Is there two-factor authentication for accounts in the iCloud, Gmail, and other platforms?
Prepare Details of All Software Used to Pass to the New Buyer
This should include info about all input and output programs, for example, Microsoft programs, Quickbooks, etc.
Share All Passwords, Credentials, and Codes
You’ll have to update ownership and contact information for software and website hosts.
Look at Domain Renewal Dates
Find out when your software renewals are due. Make a list for the new owner.
Make Sure the Buyer Obtains Business Permits and Licenses
Without the proper permits and licenses – paid up to date – a business can be shut down. A new owner needs a comprehensive list, which can include:
- General license
- Tax registration
- Health permits
- State-issued occupational licenses
- Liquor license
- Lotto license
- Reseller’s license
- Zoning and land use permits
- Health department permits
Notify Employees
Employees will rightfully be concerned about any changes in ownership. Employees should be notified early in the sale process.
For many owners, this may be the hardest step in selling your business. Tangible and intangible assets aside, the employees are the true assets of a small business. They should be treated as valued assets.
Let them know:
- If the business sells, will they keep their jobs?
- Will the way the company operates and/or company policies change?
- If employees will lose their jobs, will the present owner provide letters of recommendation?
Identify Any Outstanding Work
Are there any projects or production orders that haven’t been fulfilled? When are those contracts scheduled to be completed?
Outstanding projects can be viewed as liabilities by the buyer, especially if there’s a wrench in the works. Maybe a job is held up because of supplier issues, for example. Liabilities can be lessened if the seller proactively explains what’s being done to complete contracted work or service.
Consider Exit Strategies
The exit strategy provides the owner with an opportunity for due diligence, which should be completed prior to signing an agreement to sell with a broker. What are the tax implications of selling your business? When is the optimal time to sell the business? Where is the best place to invest the money after selling your business?
One of your most important sales advisors is your financial advisor. A financial advisor can help you make the wisest use of the proceeds from a business sale.
Prepare Succession Agreements
In the legalese of a succession agreement, the “tenant of record surrenders the right to a lease.” But in a business sale, that term is applied to the legal strategy that will be used to transfer leadership from one owner to the new owner.
Create Confidentiality Agreements
This is a job for your commercial sales specialist attorney.
You’ll need two types of confidentiality agreements:
- Before the sale. This agreement will protect you from buyers who could misuse financial or privileged information about your company.
- After the sale. Are there elements of the deal that you don’t want to be made public? Maybe your reason for selling your business is very personal, such as a family matter.
Prepare the Purchase Price and Sale Agreement Documents
The purchase and sale agreement document is the final part of the process. The purchase and sale can be broken down into parts, which can protect both parties:
- The Indication of Interest – This is signed by both parties and is often a requirement before a buyer learns about the business assets, gets copies of tax returns and other documents.
- The Letter of Intent – As a tool in selling your business, the letter of intent can be used as a sign of a pending purchase.
- Purchase Agreement – This is the final step when you sell your business. It will be signed by you and the new owner.
Sign the Closing Documents
The closing documents must be signed by both parties. Typically, the broker and attorneys representing each side will be present when the agreement is formally signed.
Increasingly, both residential and commercial sales aren’t transactions that occur face-to-face. In the real estate industry, transactions are conducted via Zoom or similar technology. The same people will be involved – buyer, seller, broker, attorneys – but they won’t be in the same room when the agreement is signed.
Why the Due Diligence Process is Important When Selling Your Business
Due diligence works both ways.
Of course, the buyer gathers all possible information about the small business.
When you’re selling your business, it’s just as important that you apply the same due diligence to your investigation into the prospective buyer:
Does the buyer possess the necessary assets to complete the purchase, or is there a risk that the deal could collapse? The seller certainly doesn’t want the thrill of reaching an agreement to diminish when they realize that the buyer lacks the financial resources required to acquire the business.
The seller has the right to do due diligence to determine the buyer’s net worth, to determine if the buyer can live up to the agreement.
What documents are needed to sell your business?
Let’s review the basic documents you’ll need to organize when you sell your business. It’s all part of the process, and this list can help you get started before you meet with a broker and attorney:
- Tax returns – businesses should provide tax returns from the past 3 years
- Lease agreements – gather these for equipment, vehicles, property, and office furniture.
- Copy of employee handbook
- A written statement about your reason for selling
How do you figure out the worth of a business?
The easiest way to do this is to seek the advice of a business valuation expert. That person’s advice will be impartial and based on experience and training.
Either way, you’re going to need facts and figures to support the sales amount. You can list all the businesses’ assets, both tangible and intangible, and put a value on them. You can review accounts, weighing future profits against costs, and put a value on them.
Unless you’re going to sell your business to family or an employee, you’ll hire a broker. A broker can also give you advice about determining the sales value. The broker may look at similar sales within the industry.
Who pays closing costs when selling a business?
Typically, in the real estate industry, the buyer is responsible for covering the closing costs. Real estate taxes are prorated, meaning that each party pays a share based on how many months of the year they owned or will own the property.
A sales tax will usually be paid to the state.
The buyer and seller can negotiate who pays the bulk of the closing costs as part of the sales agreement.
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