The Six Steps to Selling Your Small Business
1. PREPARE YOUR BUSINESS
Before you put your business on the market, take the time to get it in the best shape possible. Proper preparation makes the sale process much smoother and helps you get a better price. Here’s how to prep your business:
Start early: Ideally, begin preparing at least a year in advance of your target sale date. Use this time to clean up your financial records, streamline operations, and address any weaknesses or issues.
Organize your finances: Make sure financial statements and tax returns (for the past 3+ years) are accurate and up-to-date. Consider having an accountant review them. Resolve outstanding bookkeeping issues and tighten up expense tracking. A solid financial track record gives buyers confidence.
Improve business performance: Take steps to boost sales and profits if possible, or at least show consistent performance. Diversify your customer base and tidy up operations. For example, repair or replace any broken equipment and spruce up your facilities so the business looks well-maintained. These improvements can make your business more attractive to buyers and even increase its value.
Assemble your advisory team: Don’t do it all alone. Hire a professional M&A advisor like Founders Exit Group to help you navigate the sale. Experienced advisors can provide invaluable guidance on legal documents, valuation, and negotiations.
2. DETERMINE VALUATION
One of the first questions any buyer will ask is: “What is this business worth?” Determining a realistic valuation for your company is critical. Pricing your business too high can scare away buyers, while pricing it too low means leaving money on the table. Here’s how to tackle valuation:
Assess your business’s worth: Look at your financials (revenues, profits, assets, growth trajectory) and research how similar businesses are valued. Common valuation methods include the income approach (based on your earnings and cash flow), the market approach (comparing recent sales of similar businesses), and the asset-based approach (assets minus liabilities). Many small businesses are valued as a multiple of their annual profit or cash flow, but the right method depends on your industry and situation.
Get a professional appraisal: This independent valuation can lend credibility to your asking price and help you set a fair price that buyers are more likely to accept. A solid, credible valuation analyzes your financials as well as market conditions to produce a detailed report of what your business is worth. Founders Exit Group can assist with valuation using our proprietary system that incorporates industry benchmarks and relevant recent deal data.
Be realistic with price: It’s natural to feel your business is worth a lot but try to stay objective. Use the valuation as a guide for your asking price, and be prepared to justify that number with data (financial performance, customer base, growth potential, etc.). Having a reasonable, well-supported price will attract serious buyers. Remember, the goal is to maximize value without overpricing – you want a price that reflects your company’s worth and also stands up to buyer scrutiny.
Tip: Discuss the valuation with your financial advisor to strategize on pricing. You might set an asking price slightly above your minimum to allow room for negotiation. Just make sure any price you set can be backed up with facts and figures about your business’s performance and assets.
3. FIND POTENTIAL BUYERS
With your business ready and a target price in mind, it’s time to find the right buyer. This step is about marketing your business confidentially and reaching qualified prospects who might be interested in acquiring it. For small businesses (typically under $30M deals), you have a few avenues to consider:
Use an M&A advisor like Founders Exit Group: An investment banking advisor can handle the heavy lifting of finding and screening buyers for you. They help market your company through their own extensive networks. Engaging an investment banker can connect you with a broader pool of buyers and potentially fetch a higher price. While bankers charge a commission (often around 10% for small deals), they can often negotiate better overall deal terms than owners can on their own. This option also lets you focus on running your business while the banker manages the sale process.
Market the business quietly to protect confidentiality: You don’t want employees, customers, or suppliers learning about a potential sale too early. Craft a compelling but non-confidential summary of your business (omitting identifying details) to pique buyer interest. This might be called a “teaser.”
Qualify potential buyers: When inquiries start coming in, be prepared to handle them. You’ll want interested buyers to sign a Non-Disclosure Agreement (NDA) before sharing detailed information about your company. This legally binds them to keep your data confidential. It’s wise to vet buyers’ financial capability as well – find out if they have the financing or funds to actually complete the purchase. Serious buyers should be willing to provide proof of funds or pre-qualification for a loan. By screening buyers, you avoid wasting time on unqualified “tire-kickers.
Create competition: Having multiple interested buyers is great leverage. If you can, keep two or three potential buyers in the mix. That way, if one deal falls through, you have backups. Multiple offers can also improve your negotiating position on price and terms. Even if you have a favorite buyer, it doesn’t hurt to have alternatives until a deal is signed.
Negotiate initial terms: Once you identify a very interested buyer, you’ll move into more serious talks. Typically, the buyer will present an offer or term sheet – often in the form of a Letter of Intent (LOI). The LOI outlines the proposed price, payment terms, and conditions of the purchase (it may be non-binding or have certain binding clauses like exclusivity). Review the LOI with your advisors and be prepared to negotiate key points. When both sides sign an LOI, it signals a mutual intent to proceed with the sale under those terms, and usually the buyer will then dive into detailed due diligence.
Tip: Maintain confidentiality until the sale is nearly finalized. Avoid telling your staff or customers about the sale too early. If word leaks that the business is for sale, it could unsettle employees or give competitors an opening to spread rumors. Always use NDAs with prospective buyers and share sensitive information in stages – give more detailed data only as the buyer progresses further in the process. This protects your business in case a deal doesn’t go through.
4. DUE DILIGENCE
After signing an LOI or otherwise agreeing on a tentative deal, the buyer will conduct due diligence. This is essentially a thorough investigation and review of your business to confirm everything you’ve presented and to uncover any issues. From the seller’s perspective, due diligence can be the most intense part of the process – but good preparation will pay off here.
Gather and organize documents: You’ll need to provide a range of documents and information so the buyer can evaluate the business fully. It’s common to upload these to a secure online data room for the buyer to review. Typical due diligence documentation includes:
Financial records: past financial statements, profit/loss reports, tax returns (usually 3–4 years), sales forecasts, accounts receivable/payable aging reports, and an inventory of assets and debts.
Corporate and legal documents: your corporate formation papers, ownership records, major contracts, customer and supplier agreements, leases for premises or equipment, licenses and permits, intellectual property registrations, and any insurance policies.
Operational information: an overview of how the business runs. This might include an organizational chart or employee roster (with roles and tenure), standard operating procedures or an operations manual, information on key customers and suppliers, and marketing materials. Essentially, the buyer will want to understand all the moving parts of your company. Any known issues or liabilities (ongoing lawsuits, regulatory matters, etc.) should also be disclosed at this stage.
Be responsive and transparent: During due diligence, the buyer’s team will likely come back with lots of questions. They may request additional documents or clarifications on certain aspects (for example, asking about a dip in revenue last year or seeking details on a client contract). It’s important to respond promptly and openly. If you’ve prepared well, most of their questions will be easy to handle. Honesty is crucial – hiding problems will only derail the deal later if the buyer discovers them. In fact, it’s often better to proactively disclose any minor issues upfront (with an explanation of how they’re being handled) to build trust with the buyer.
Work with your advisors: Your investment banker will coordinate with your lawyer and accountant throughout due diligence. They can help compile the information and address the buyer’s concerns (for instance, your accountant can explain accounting practices or adjust financial statements for unusual expenses, and your attorney can handle legal document requests). If the buyer raises any red flags or proposes changes due to what they find, negotiate solutions. For example, if an issue is found, you might agree to a slightly lower price or an earn-out (where part of the price is paid later contingent on business performance) rather than losing the deal.
Stay focused on operations: It’s easy to get consumed by the paperwork, but remember to keep running your business well during this period. The deal isn’t done until closing, and the buyer may even be monitoring that the business remains stable in the interim. Continue to meet sales targets and manage your team; show the buyer that the business performance is solid right up to the handover.
Tip: Due diligence is a two-way street. While the buyer is examining your business, you should also assess the buyer (especially if you’ll receive any financing from them or if you plan to stay involved as an employee or part-owner post-sale). Don’t be afraid to confirm the buyer’s ability to pay, their plans for the business, or any other aspect that’s important to you. A successful sale is not just about the money – it’s also about finding a buyer who will follow through on the deal and, ideally, take good care of the business you built.
5. CLOSE THE DEAL
If due diligence goes well and no major issues arise, you’ll move to closing the sale. The “closing” is the final phase where all the legal documents are signed, the funds are transferred, and ownership officially changes hands. Here’s what happens as you approach closing:
Draft the purchase agreement: Work with your investment banker and attorney to prepare a sales/purchase agreement that includes all the terms of the deal. This contract will spell out exactly what is being sold (assets or stock), the purchase price and payment method, and any representations and warranties by both parties. It also covers details like what happens if either side breaches the agreement and any agreed post-sale arrangements (for example, if you as the seller will stay on for a transition period). Every asset and liability involved in the sale should be listed and accounted for to avoid misunderstandings later. Have your lawyer review everything to ensure it’s accurate and comprehensive.
Handle any final steps or approvals: Now is the time to tie up loose ends. This can include getting third-party consents or approvals required for the sale – for instance, the landlord’s approval to transfer a lease, consent from key customers or suppliers if contracts require it, or finalizing any bank payoff letters if you have loans that need to be settled. If any regulatory filings or approvals are needed (more common in larger or regulated businesses), those must be completed as well. Essentially, you’re making sure that nothing will block the transfer of the business to the new owner.
Set up the closing logistics: Typically, both parties will decide on a closing date. At closing, you and the buyer will sign all the needed documents. These often include a Bill of Sale (transfers ownership of the business assets), assignment forms for any leases or contracts being transferred, and possibly a security agreement if you, as the seller, are financing part of the purchase and retaining a lien on the business until paid in full. If a third-party lender is financing the buyer, there will be loan documents to sign as well. An escrow agent or your attorneys can help facilitate the closing – for example, the signed documents and funds can be held in escrow and released once all conditions are met. Make sure you understand everything you’re signing; your lawyer will explain your obligations (and any ongoing liabilities or non-compete clauses you might have agreed to).
Transfer ownership and celebrate: Once the paperwork is done and the money is exchanged (usually you’ll get a wire transfer or cashier’s check for the proceeds), the business is officially sold! Hand over any keys, assets, and important information the new owner will need. This might include logins/passwords, client lists, or training on the operations. Many small business sales include a transitional period where the seller stays on for a few weeks or months to train the new owner – if that’s part of your deal, be prepared to help out to ensure a smooth handoff.
6. LIFE AFTER SELLING
As the sale gets nearer, start fleshing out your post-sale plans for real. If you’re moving, research locations. If you’re retiring, maybe outline some projects or hobbies you’ll pursue, or plan that long vacation. If you think you’ll start another business, begin exploring ideas (without conflicting with your current business). Having a vision for your next chapter will make the emotional transition easier. It’s common for entrepreneurs to have second thoughts as the sale nears, “Maybe I shouldn’t sell, what will I do every day?” A clear plan for post-sale life – even if it’s “relax for 6 months then consult part-time” – helps to reduce that anxiety.
And before you start your post-sale vacation, take a moment to plan what you’ll do with the proceeds from the sale. Speak with a financial advisor and a tax professional about the best way to manage or invest your funds for your future goals. There may be taxes due on the sale, and a professional can help you minimize that and make wise decisions with your newfound capital.
