Selling a small business isn’t like selling lemonade, or even selling a car. It’s a major undertaking with several moving parts, requiring experienced negotiators, capable lawyers, and a successful strategy from day one.
Which means that if you want a sale to succeed, you need to go in with a plan.
If you plan on selling your business, here are seven steps you should take to make the whole process easier.
1. Get Your House in Order
Before you do anything else, you should start by getting your affairs in order.
You might not think that you need to. After all, the business is profitable, and while there are areas where functions could be clearer, everything more or less goes without a hitch.
Keep in mind, though, that you’ve been with your business since the start. Things that make sense to you could easily spook a potential buyer.
When you first consider selling your company, make sure to get these things in order:
- Financial records
- Financial reports
- Employment contracts
- The legal structure of your business
- Any family ownership arrangements
- Intellectual property arrangements
If you’re unclear on any part of the puzzle, your attorney can help you figure out where you should focus and how to protect your assets in preparation for a sale.
2. Prepare the Right Documents
The next thing you can do to smooth out a deal (and help your lawyer’s peace of mind) is making sure that you have the right legal documents prepared.
This includes things like:
- Financial statements (profit and loss, cash flow projections, etc.)
- A complete list of stockholders and shareholders
- A breakdown of the percentage of shares owned and stock issued
- A list of names and titles of everyone authorized to sign papers for your business
- Copies of all employment contracts
- Copies of all your business’s insurance policies
- Copies of your incorporation papers or equivalent paperwork
- Copies of your federal and state tax returns going back three years
- Copies of any pending lawsuits
- A schedule of company assets
- A complete list of your company’s creditors
Keep in mind that this list is by no means exhaustive. If you’re not sure what documents you need, ask your attorney.
3. Separate Lines of Business
Multiple lines of business help your business stay profitable.
Unfortunately, they also make it harder to value, which can drive away potential buyers.
You look at your business and see an integrated whole. A buyer may only understand one aspect of the business, so they see it as fragmented or view certain assets as liabilities.
You can help keep a buyer interested by separating your business assets into clear divisions. This will help buyers get a clearer picture of the benefit of acquiring your business, which may lead them to offer more.
4. Know the Value of Your Business
With that in mind, it’s vital that you know the value of your business before you try to sell it.
Specifically, you should understand the value of your business from a buyer’s perspective.
The best way to do this is through a business valuation. This will keep you from fixating on a specific sale price from start to finish, and thus keep you from leaving buyers’ money on the table.
Get in touch with an appraiser and ask them to draw up a detailed explanation of the business’s worth. This will add credibility to your asking price.
5. Reason for and Timing of the Sale
Buyers will want to know, so you should figure out the reason and timing for the sale of your business before you sit down with a buyer.
Owners sell businesses for any number of reasons, though these are among the most common:
- Becoming overworked
- Partnership disputes
- Illness or death
All of these are reasons that a buyer will generally accept at face value. On the other hand, if you’re trying to sell your business because it’s no longer profitable, you’re going to have a much harder time bringing in buyers.
Part of these considerations is the timing of the sale. Ideally, you should start to prepare for the sale a year or two ahead of time so that you can make your business appear more attractive in the meantime and get everything in order before you initiate a sale.
6. Put Together the Right Team
If you’re looking to get out of your business, the last thing you probably want to do is pay an outside team to come in and help prepare for the sale, since it will only cost you money.
This is a critical mistake.
Recognize up front that you, as a business owner, are probably the worst person to negotiate your own account. You want an impartial third party that will look at the facts without emotional attachment.
With that in mind, don’t hesitate to assemble the right team to help with the process. If needed, bring on specialists who know how to deal with large buy/sell transactions.
7. Create an Exhaustive Letter of Intent
Finally, you should make sure you create a comprehensive letter of intent before you start a sale.
Everything you care about should be included in the letter. If everything is covered, it gives you much greater leverage in negotiations. For example, if a buyer’s team attempts to erode the deal, you can refer them to the letter–the buyer will have to justify signing a letter if they didn’t expect to honor the terms.
Thinking of Selling Your Business?
If you’re thinking of selling your business, the last thing you should do is make it up as you go along.
Instead, get an attorney on your side who knows their way around these types of deals. That’s where we come in. We’re experienced business lawyers who will help you chart the best course of action for your business.