Selling a business can be a momentous and complex endeavor, especially for first-time business sellers. Whether you've built your company from scratch or acquired it along the way, the process of selling a business requires careful planning, consideration, and understanding. In this post, we will delve into the key aspects that first-time or even seasoned business sellers should expect throughout the listing and selling process, helping you navigate the journey with confidence.
1. Preparation and Valuation:
Before listing your business for sale, it's crucial to prepare and assess its value. This involves gathering financial records, organizing documentation, and reviewing the market position of your business. Engaging with professional advisors such as a business broker can provide valuable insights into determining an appropriate price range and maximizing the value of your business.
2. Confidentiality and Marketing:
Maintaining confidentiality is vital during the listing and selling process to protect your business's goodwill and prevent any negative impact on ongoing operations. If you are working with a reputable business brokerage, like Green & Co, they will already have a proven comprehensive confidential marketing strategy that reaches potential buyers while safeguarding sensitive information. Here’s what we do to protect seller confidentiality:
- We advertise using a “confidential listing title” which is essentially just a general 3 or 4 word description of your business. For example, “Commercial Plumbing Contractor” or “Insurance Sales Firm.” This lets potential buyers know what the business does, but it doesn’t give them an identifiable name of the business.
- We also use a confidential public ad (on consumer sites such as BizBuySell.com and on our website etc) to generate interest in the business listing. It gives enough information about the business to inspire buyers to inquire, but it DOES NOT give any specific information about the business that would give away which business is actually for sale. It also gives the general location of the business, but usually just at the county level. For unique businesses, we can just advertise that it’s in the State of Florida (or whatever state it happens to be in).
- Once a potential buyer makes an inquiry, they are required to complete and sign a confidentiality agreement (also known as a non-disclosure agreement or NDA for short). This is done to ensure the confidentiality of information shared with prospective buyers. By signing, they agree not to share any information they receive with any other party. Once the NDA is signed, then the buyer still needs to jump through hoops in order to get any specific information about the business.
- Screening potential buyers is a crucial step to ensure that only qualified individuals or entities with genuine interest and financial capacity will receive your business’s confidential details. We start with having the buyer complete a “Buyer Questionnaire” and then move to having either a phone call or zoom call with the potential buyer. Once your business broker has determined that the buyer has genuine interest in the business opportunity and that they are a viable buyer, only then will they be given the business’s “Confidential Business Review” or CBR as we call it. This brochure is created by our marketing department with your full approval. It identifies the business name, specific location, operating information, financial history, and outlines opportunities for a new owner to grow and develop the business. This CBR is created as part of the listing process, before the listing “goes live.”
3. Buyer/Seller Meeting:
After the buyer has had time to review the CBR, if they are interested in moving forward in the process, a buyer/seller meeting is arranged. This is done via conference call, zoom meeting, or in person. It is the buyer’s chance to ask you more in-depth questions to decide if they want to make an offer. It’s your job to provide them with as much information as you are comfortable providing at this point, and to “sell” your business to them.
4. Offer and Negotiations:
In small business sales, we typically skip the LOI (Letter of Intent) that is used for bigger mergers and acquisitions. This is not typically used because it requires the parties to negotiate contract terms twice, so we normally just submit a full offer so all terms can be negotiated and agreed up front. Most small business owners who are selling are also trying to run their businesses at the same time, and they don’t have the time to negotiate twice, so we just cut to negotiating the purchase contract when we make an offer. Once an offer is received, negotiations will commence, involving discussions on price, terms, and other key aspects of the deal. It is essential to strike a balance between achieving a favorable outcome and maintaining a cooperative relationship with the buyer, as the two of you will have to work very closely throughout this process. That’s why having a business broker as a buffer between buyer and seller is ideal.
5. Due Diligence:
Once an agreement is reached and the purchase contact is executed, the buyer will initiate the due diligence process. Expect the buyer to review your business's financial, legal, operational, and other relevant records. This stage aims to validate the information you provided, assess risks, and uncover any potential issues that may impact the deal. Be prepared to cooperate and provide requested documentation promptly, as delays in due diligence can lead to a loss of buyer interest or renegotiation of terms.
Gathering all of the documents can be very time-consuming and burdensome on the part of the seller. So, if you are prepared in advance, this part will be much easier. Assemble all of these items now, make sure they are in electronic file formats, and put them together in anticipation: last 5 years of corporate tax returns, Profit and Loss statements, corporate bank statements, copies of 1099s and W2s, point of sale records, invoices, copies of leases, receipts for personal items you are putting through your business’s financials (for example, paying your personal car payment through the business, when it’s not really used for business). You will be ahead of the game if all of this is done before your due diligence period starts.
6. Road to Closing and Beyond:
After successfully navigating due diligence, the purchase contract will outline the specifics of any other contingencies that need to be met, such as a loan contingency, lease contingency, or franchise contingency. You will work with your business broker and the buyer to get these contingencies satisfied and keep the deal moving forward towards closing. Then, once contingencies are removed, you will work closely with the buyer to prepare for the closing, helping them establish setting up necessary utilities, computer software programs, point of sale service, any required licenses, securing vendors/suppliers etc. Basically, the buyer needs to be ready to take over operations on closing day. Once the closing is done, familiarization or owner handover will happen. Usually this period lasts for 2 weeks after closing, but the time period is negotiable in the purchase contract. This is when you will introduce the new owner to the employees, make client introductions, and basically teach the new owner how to run the business.
7. Hire Professionals with Experience in Business Sales
One of the most important factors for a seller is who they hire as professional advisors during the sale of their business. First, you need to make sure to hire a seasoned business brokerage that has a proven record of success. Ask to see samples of their marketing, ask to see testimonials from past sellers, and make sure you are comfortable working with them. Second, some sellers want to have an attorney or CPA involved in the process too, and that’s perfectly fine, but here’s the MOST IMPORTANT thing to remember here. Most attorneys and CPAs are not experts in business sales. So, it’s imperative that you specifically hire an attorney or CPA that has an extensive background with business sales. If they don’t have the experience, unfortunately they will not be able to advise accordingly, and can often make the process much more confusing and complicated for all parties, as they do not understand how it all works. Your family attorney or CPA might be someone you trust, but they are not necessarily in the best position to assist with this specific endeavor. Don’t know any attorneys or CPAs with business sale experience? We have a whole list of options that we can send to you, and then you can decide if you’d like to work with any of them.
Selling a business can be a challenging and complex process, but with the right preparation and guidance, it can also be a rewarding experience. By understanding the steps involved and having a team of trusted advisors by your side, you can navigate the selling process successfully. Remember to plan ahead, maintain confidentiality, negotiate thoughtfully, and cooperate during due diligence, preparing for closing, and in the familiarization period. With these key considerations in mind, you'll be better equipped to embark on your journey as a first-time business seller and achieve a successful sale.