Ten Steps to Selling a Business

There are many different reasons you may have decided to sell your business. Perhaps new or different professional opportunities have emerged and you're ready to sell so you can pursue them. Maybe health issues precipitated the sale, or maybe it’s just time to step away, relax, and enjoy the fruits of your labor as a retiree. Whatever the reason, your decision to sell wasn't a hasty one and you owe it to yourself to ensure the process of selling and transitioning out is smooth, efficient, and beneficial. 

Selling a business is unique in terms of the planning, execution, legality, and timeline of sale. Think of it this way: Just as you didn't build a successful business overnight, you can't expect a profitable sale to happen overnight. But don't let the nuances and intricacies of selling a business overwhelm or discourage you. The best thing you can do when preparing to sell your business is to approach the process in an organized, thoughtful, and incremental way. The good news is, as a successful business owner, you're already highly skilled in each of those areas.

We've drawn on our experience as a leading global marketplace for entrepreneurs to compile 10 well-defined steps to guide you through the fundamentals of selling. Following these steps will help you experience a smooth transition for yourself, your employees, your customers, and your buyer.

Step 1: Hire A Business Broker

There's no doubt that, as a business owner, you understand quite a bit about finances, marketing, and industry regulations. However, selling a business is very different from growing and maintaining a business. The intricacies and details involved in valuation, deal structuring, taxation, and even communication with employees throughout the sale present numerous challenges. Don't take chances at this crucial stage — you've worked too hard to build your business to have everything fall apart during a sale. 

While you should seriously consider hiring a specialized accountant, tax advisor, and attorney to work with you on selling your business, the most important hire will be your business broker. Brokers are experts at selling small to mid-sized businesses and they’ll be able to handle such details as ensuring orderly accounting records, marketing and valuation, determining buyer qualifications, entering negotiations, and more. 

Step 2: Provide Broker Information and Set an Asking Price

Your broker is going to want some specifics from you regarding your business. These details will almost certainly include (but are not limited to) the following: 

• Financial statements (profit and loss) 
• Accounts payable and receivable reports
• Client or customer lists 
• Client, shareholder, and warranty contracts
• Payroll and employee information

Your broker will use this information to help value your business and work with you to determine a favorable asking price. A good business broker will have a unique understanding of the current marketplace, up-to-date data on recent sales, and relationships with marketing contacts and potential buyers. The broker's specialized knowledge, coupled with your business details, will help you set your asking price in the most profitable range while also being realistic, encouraging a quick, smooth sale. 

 Step 3: Compose an Offering Memorandum 

An offering memorandum (also called a "selling memorandum" or "confidential information memorandum") is a crucial component of the sale of any business. Offering memorandums provide an overview of the nature of the business and the terms and conditions of an investment opportunity. Your offering memorandum should include details of your business without being too technical or revealing highly confidential information. Potential buyers should sign a Non-Disclosure Agreement (NDA) before receiving the offering memorandum, but you still need to be careful with the information you include.  

For example, you'll want to provide your business location, information about products or services offered, the number of employees, and a complete overview of why your business represents a good investment. However, you'll want to leave out such things as specific terms of client or customer contracts, detailed operating procedures, or other information that could be used against you by your competitors. Highly confidential information is only provided to buyers during due diligence (Step 7). In addition, your offering memorandum should highlight the best aspects of your business while avoiding hyperbole or any false claims about past successes or future profit predictions. 

All of the information in the offering memorandum must be factual and verifiable. Be open and upfront about any potentially negative features of the business and any limitations in operation as well as how potential buyers might avoid or address similar problems. Since the offering memorandum is primarily a sales tool, it may seem counterintuitive to include any negative aspects, but it’s highly preferable to be honest and forthcoming at the outset, rather than allow a buyer to uncover falsehoods, misrepresentations, or deficiencies on their own. You should strike a balance between motivating prospective buyers and providing all the facts about your business. 

Step 4: Market to Buyers

When marketing a business for sale, discretion and confidentiality are essential. That means typical marketing strategies and materials won't necessarily work — and could even hinder your success. The marketing phase is another area where a trusted business broker is invaluable. Working with a broker ensures your best interests while acting cautiously to avoid panicking employees, clients, or creditors (or tipping off your competition too soon). While your business broker should take on the lion's share of this work, familiarizing yourself with your marketing needs is helpful. 

The offering memorandum you created will help you compose marketing materials related to your business specifics and finalize an executive summary, or summary profile. From there, your broker (with your input) will: 

• Draw attention to the unique aspects of your business.
• Detail your business’s competitive advantage and evolution story.
• Highlight successful marketing and recent growth.
• Identify and clearly communicate growth potential and upward market trends.
• Identify and reach your target buyer — your business broker's connections and investor relationships will be a tremendous asset here. 

Using services like those offered by DealStream is also an excellent way to list and market your business for sale or find investment opportunities if you’re a buyer.

Step 5: Receive Offers

Once your offering memorandum and marketing plan is in order, you will soon begin to receive offers. Again, this is an area where your business broker should shine. A broker should be able to handle everything from ensuring a buyer is legitimately qualified to navigating the negotiation process and securing NDAs. Ultimately though, it will be up to you to choose a buyer whose values align with your objectives and weed out those who aren't a fit with the structure and design of the business. 

Step 6: Sign the Letter of Intent

A letter of intent (LOI) is a document that outlines the understanding between the seller and potential buyer of the proposed terms of the deal. While it is not a legally binding document, it does indicate serious interest from the buyer and is an agreement from you of buyer fit and financial competency. Remember, even though this is a big step, the sale is still far from complete.

Step 7: Buyer Due Diligence

Due diligence takes place after you have accepted an offer from the buyer. At this point, the buyer is likely controlling the timeline and will engage in due diligence to confirm that the business was accurately represented prior to issuing an offer letter. Typically, this involves obtaining the following: 

• Detailed financial, tax, and bank statements
• Copies of any customer or supplier contracts 
• Copies of any leases or equipment rentals
• Details of any contract employees or outsourced work 
• Lists and details of inventories, licenses, and personnel records  
• The length of this period and level of detail can vary.

You can help speed things along by being upfront in your offering memorandum and having all likely documents prepared and ready to send.

Step 8: Sign the Purchase and Sale Agreement (P&S)

A final purchase agreement is drafted, including disclosure agreements, the bill of sale, non-compete agreements, and intellectual property transfer. In small business sales, the buyer may also guarantee a promissory note to the seller in cases of seller financing.

Step 9: Closing

After due diligence and buyer financing are complete and a P&S is signed, it will be time to draft the closing documents and finalize the sale. At this stage, you will want to have attorneys and accountants on hand to help you navigate various contracts and legal documents as well as minimize the tax impact of the sale.  

Step 10: Transition 

The closing is complete; you have obtained all signatures and received all funds. But you aren't done just yet. 

After the closing, you will need to communicate the final details to employees and other stakeholders and facilitate meetings with the new owners. Some small business owners may issue a statement or a press release to ensure vendors, consumers, and customers are all made aware. Because the actual duration of the selling process can depend on factors like the value of the enterprise, consumer demand, market behavior, and ease of due diligence, it can take up to one year for a business to sell. Presumably, you have been at the helm of a team of employees and loyal customers who have been the catalysts of your business’s success. How you communicate about information gathering and other noticeable signs of change during the selling process and how well you communicate through the final transition period will become part of your legacy as a business owner. 

We've all heard horror stories about companies that went through a merger or acquisition and blindsided their employees with layoffs right before the holidays. We've also heard stories about businesses that have handled the selling period so poorly that not only did the sale fall through, but their employees were left so disgruntled or anxious that the business failed, making any future sale nearly impossible. You don't want to be that business owner. 

It's worth the time and energy to develop a detailed transition arrangement. Determine who will need to be involved early on and at what level. Then, consider how you will communicate the news, what you will need to explain, and when you will hold the explanatory meetings or send the communications.  

Final Thoughts

Before taking the first step on the sales journey, you should set aside time to ensure you truly understand your business’s unique culture, the "flow" of daily work, and all past financial and communication strategies that have been effective. This planning will enable you to make solid decisions throughout the entire process — even if aspects of the sale become stressful. It will also go a long way toward ensuring the final transition period goes smoothly and positively. 

Selling a business is no small feat. It requires time, preparation, and both monetary and human resources. The sale of a business can also take an emotional toll. Be sure to avail yourself of the many options for communication consulting, selling seminars, and organizational counseling to help you make it through and still have the energy left to enjoy the fruits of your labor.

Nichole Brazelton, Contributing Editor