When you’re preparing to sell your business, preparation is the key. You’ll need to eliminate as much debt as you possibly can, gather all of your important financial documents for potential buyers to analyze, and discover any potential weaknesses. This will help you maximize the overall value of your business and speed up your sale process.

Pay Off Business Debt

The more debt you can pay off the better your financials will look to potential buyers. Showing debt on your books might turn off a lot of people from even considering the business. And for those interested in the business even with the debt, they’ll typically offer you a lower purchase price than if the debt wasn’t there. There’s a good chance that you’ll be asked by the buyer to pay off any debt with proceeds from the sale anyway, so you might as well take care of it now. It might make cash tight until you sell, but this is beneficial since it’ll force you to tighten your company’s budget, increase your working capital, and therefore increase the business’s overall valuation, offsetting much of the cash you use to pay off the debt.


Organize Financial Information

Experienced buyers want to see that you’re prepared for the sale before they take a look at your business. You’ll need to make sure your books are clean and look good. You should also provide projections of at least 3 – 5 years, showing future opportunities for the business to succeed. If you can’t give them the financial information they need or get it for them quickly, they’ll likely move on to the next opportunity.

Many businesses prepare a data room online that securely keeps all of the business’s financial information for potential buyers to see. This helps you keep all of your data organized and gives potential buyers the ability to look at it within minutes. All you have to do is grant them access to the room.

Identify Weaknesses

Every business has weaknesses, and potential buyers will be quick to point them out. The best way to deal with them is to shore them up before you sell. If you can’t, then you need to be upfront about any potential weaknesses and provide a plan on how to potentially overcome them. Trying to hide weaknesses will just create uneasiness for buyers when they’re discovered. Plus, your potential buyers may not understand how to overcome these issues if they’re not experienced in the industry. Dealing with these issues early or providing a plan for overcoming them will give buyers more comfort and confidence in your business.

Every business sale is different, and it’s hard to know exactly how long your business will take to sell. On average, businesses take at least 6-9 months to sell, starting from the time you actively start looking for a buyer. To be safe, a rule of thumb is that you can assume a year from the start of the process to the completed sale of your business.

The length of time isn’t necessarily tied to finding a qualified buyer. More than half of potential buyers are qualified and able to close the transaction. It’s just a matter of finding the right buyer for your business, which can routinely take up to a year.

Keep in mind that the length of time it takes to sell your business will change based on many things. While 6-9 months is a good estimate overall, your industry, location, financial performance, and current economic conditions will all play a factor in getting a buyer to close an acquisition.

Businesses that are owner financed almost always sell better than those that aren’t. In addition, businesses that offer seller financing often sell for 10-15% higher than businesses that do not, although it is more about opportunities to close the deal than actually adding value.

With seller financing, you can expect to finance around 60-70% of the sales price, with the rest as an upfront payment. Terms generally last 5-7 years and 6-10% is a common interest rate. When you provide seller financing, you are deciding to trust that the new buyer can run the business effectively and pay off the loan.

These are high-level financial documents that give potential buyers an indication of your success and will tell them off the bat whether they’re interested in your business or not. You should limit this information to just a few key documents because you don’t want to divulge too much proprietary information until you know the buyer is qualified.

Here are the 5 main documents you should have ready to show potential buyers first:

YTD Income Statement

The year-to-date (YTD) income statement shows your business’s revenues, costs of goods sold (COGS), operating expenses, as well as operating profits, and net profits. This is the document potential buyers will look at when assessing profitability and valuing the business using industry multipliers.

YTD Balance Sheet

The year-to-date (YTD) balance sheet breaks down your business’ assets (equipment, money owed business, goodwill) and liabilities (loans, debts, liens, and other money the business owes). Having this document ready gives your buyers a one-stop resource for seeing the assets and debt of the business.

YTD Cash Flow Statement

Your cash flow statement is a breakdown of all the money that comes in and goes out of the business, including net gain. You’ll see your operating, investing, and financing cash flow for your business which can answer a lot of potential questions your buyers will have. And it tells the buyer how much working capital the business has to work with each month, which is what matters.

Tax Returns For the Last 3 Years

Buyers are going to want to confirm that you have filed and paid taxes for the business. Also, they will look at revenue, net income, and tax payment numbers to confirm that the financial statistics you’ve provided them with your financial statements are correct.

Summary Book of Your Business

You or your business broker should put all of the above information in a deal summary deck or book. You should include a summary and explanation of the business and even list how you stack up against your competition. Anything that makes your business look great should be included.

When you have a buyer that advances to the due diligence stage, you’ll be required to open up your books and provide them with the remaining pieces of financial information. You shouldn’t worry about giving this up as long as you’ve made the buyer sign a non-disclosure agreement (NDA). The information requested during due diligence will vary by buyer, industry, and the concerns of each business.

Here are the most important documents that you need to have ready for due diligence:

• Proof of Business Ownership
• Business Licenses
• Payroll Summaries for 1 Year
• Outstanding accounts payable
• Outstanding accounts receivable
• Current Loan Documentation
• Lease Contracts
• Sales Contracts
• Details of All Chargebacks or “Owner’s Salary” in Your Financials
• 3 years of profit and loss statements
• 3 Years of cash flow statements
• 3 Years of balance sheets

You may not have all of these documents available during the sale process. If that’s true, then you should be prepared to give a reason why to any potential buyers.

There is no easy answer to this question. A good business broker can be a great help. However, business brokers can be costly and you might be able to line up a buyer on your own. Knowing when to use a broker depends on your expertise, the complication of your business, and how much you can afford to pay a broker.

When To Hire a Broker

Here are the 4 times you need to hire a broker:

• If you don’t have a good idea of where to find potential buyers.
• If you don’t know what your business is worth.
• If your business network is not very extensive.
• If the extra time it will take you to sell the business will cause the business to suffer

When Not to Use a Broker

These are the reasons you may not need to hire a broker:

1. If you’re a franchisee and your franchisor will help you find a buyer.
2. If you are well-connected throughout your industry and already have potential buyers lined up.
3. If you can shop your business around and run it at the same time.
4. If you don’t want to pay the broker 10% or more of your business’s sale price.

Sellers are almost always the ones that pay the business broker. In most cases, business brokers charge a 10% or more commission rate on successful sales. So, let’s say your business sells for $175,000. If you use a broker, you are looking at $17,500 or more in broker fees. However, without the broker then you may not get the sale at all.

Regardless of whether or not you hire a broker, you certainly do not want to be doing everything on your own. At a minimum, you’ll likely need both a financial and a legal expert to help protect your interests in the transaction. You may also want to hire investment bankers or M&A consultants if your business is making over $1 million in profit every year.

Certified Public Accountant

CPAs are an important part of the business selling team. Make sure you hire an accountant who knows your business or has had previous experience preparing a business to sell. A good CPA will help you get all your business financials in order and help you navigate all of the financial aspects of the process.

Attorney

An experienced attorney will be an invaluable asset as you navigate all the legal factors that go along with selling a business. If you hire a qualified attorney, you don’t have to worry about drafting contracts and agreements. They handle all of the legal draftings for you, keeping your best interests in mind.

Investment Bankers

If you’re a bigger business that makes $1 million or more in annual profits, then you may need to hire an investment banker instead of a business broker. These are real professionals that are experienced in discreetly finding buyers for large businesses. They typically handle the entire process, including negotiations with all buyers.

Consultants

Consultants like M&A intermediaries can help you with any aspect of the sale process. They help you through each step of the process as you work towards closing with a potential buyer. From deciding on a sale price to drafting the closing documentation, they can hold your hand through everything related to selling your business.

Before you start down the path of negotiating with a potential buyer, you’ll likely want to gauge their interest and financial capacity before you try to close the transaction. We’ve put together three ways you can take to weed out those with only casual interest. If a buyer makes it past these, there is a better chance he/she is seriously considering your business.

Sign an NDA

A non-disclosure agreement is a legal document signed by both seller and buyer in which both parties agree to keep each other’s private/financial information confidential. A buyer who is willing to sign this agreement is at least interested enough in your business to sign a legally binding contract.

Ask for Buyer’s Personal Financial Summary and Credit Score or Bank Term Sheet

If the nondisclosure agreement did not scare away a non-serious buyer, this should. If a buyer is willing to provide sensitive personal financial information to you, he or she probably has more than just a casual interest in your business. This will also weed out any potential buyers that are wanting to pitch the purchase to other buyers they find for a fee, instead of purchasing the business themselves.

Set Deadlines and Stick to Them

If a potential buyer wants to buy the business, they’ll be more than willing to set deadlines for things like making an offer, signing any contracts, and closing the deal. If they can’t stick to deadlines like these, then you shouldn’t waste your time focusing on them as they’re much less likely to close the deal.

Different industries will sometimes require different agreements or contracts. However, at a minimum, you’ll need to start with an NDA for potential buyers and draft a purchase agreement to close the transaction. Some of the contracts you may need to draft include:

• Non-Disclosure Agreement
• Letter of Intent
• Purchase Agreement
• Assignment of Leases
• Assignment of Licenses
• Seller Financing Agreement
• Succession Agreements for Employee Benefit Plans
• Transfer of Patents, Trademarks, Copyrights, etc…
• Seller Consulting Agreement
• Asset Acquisition Statement
• Transfer of Contracts

You’ll also need to draft other documents that aren’t contracts, like your closing details sheet,
which both buyer and seller will need to sign off on before closing.

The length of time it takes to close depends on your buyer, how complicated your business is, and how extensive your negotiations are. Generally, you can expect 30-90 days for due diligence, 30-60 additional days for negotiations, and another 30-60 days to draft all contracts and close the transaction.

Very rarely does a business close in less than 90 days total. Instead, it can take anywhere from 90 – 210 days before you realize your sale. If your business is complicated, or you’re in a risky industry, then your sale process could take a year or more.

With many small business sales, the owner’s job is not done once the business is sold. Often, the buyer will want you to remain on for a certain period to help him/her take over the new business and become familiar with its operations. There are generally two ways this is done.

The owner Stays on as a Business Employee

In this model, you stay on as a business employee for a specified period. If you want to help transition the business and still have access to business benefits such as insurance, 401(k), salary, etc, then you will want to see if you can set this kind of deal.

This is the most common transition. Typically, the owner will stay on as an employee for up to 2+ years, often incentivized by additional payouts or equity. The reason for this is that most businesses have intricate operations that the owner knows how to best operate. The 2 years are usually spent as a knowledge transfer and as a way to make the transition more seamless.

The owner is Paid as Independent Business Consultant

Another way to transition a small business is for the buyer to pay the seller an independent consulting fee for a certain period. In this scenario, you get paid a set monthly fee, regardless of how often you were called on to help. In return, you agree to provide a certain number of hours of consultation a month. In this case, transitions can take anywhere from 1 month to 1 year.

In some rare circumstances, you may find a buyer that is interested in owning the company but not running it. They may ask you to continue running it as if nothing has changed, other than who’s ultimately in charge. Ultimately, any agreement should be discussed before closing and you should get in writing the exact expectations of both you and the buyer.

Tax Events and Financial Planning

No matter what you decide to do regarding working with the business after closing, you’ll have a lump sum of cash you’re receiving. There will be tax implications you should be aware of, and you need to prepare for what to do with your money when you get it.

When you sell your business the money will go to paying off any outstanding debts that the buyer didn’t agree to take, and then you’ll have a profit left over. That profit will be a capital gain, which will be taxable income on your tax return. If you’ve owned the business for more than 1 year then you’ll likely face a 15% tax, but if you’re in the highest tax bracket then the tax will increase to 20%. You should prepare for this tax with a CPA before you close.

The sale of a business could net you a significant amount of money at closing. If that’s the case, then you should be prepared to save or invest it in accounts that will benefit your long-term financial goals. A financial planner or CPA can help set you up to achieve those goals by investing the money at closing or by putting the money away in tax-beneficial savings or retirement accounts.

Bottom Line

Selling a business can be a difficult process that takes months to complete. If you do it wrong then you could struggle to find the right buyer, or you could cost yourself unnecessary time and money. Knowing the right answers to the most common questions can help you avoid those mistakes.