Do you want to sell your business? The sales process involves readying your business, setting a sales price, finding a buyer, and preparing the paperwork for the sale.
Consider these practical steps for making the process go smoothly.
Before you list your business, you must determine whether selling your business is the right call. You should think about why you want to sell your business. If you want to retire or move, then selling your business is probably the best option. If you can, you should plan for the sale in advance. Spend at least a year preparing for your exit. Get your financial documents in order and make sure your business is attractive to potential buyers.
If you want to sell because business is bad, then you might have other options that work better such as downsizing or hibernating your business. If you're interested in recovering or improving your business rather than parting ways with it, consider cutting costs or finding alternative revenue streams. A dying business might be unattractive to potential buyers. So trying some cost-saving options could turn things around or fetch you a higher sales price if you do decide to sell.
The getting-ready process includes not only sprucing up your premises but also getting your numbers in good shape. It's a good idea to enlist professionals at this stage. Consider working with an accountant, tax professional, appraiser, or broker (discussed below). Buyers will want to do their due diligence before buying a business so you should start preparing for the process now.
Organize your records. Buyers will want to review your files as they mull over their options. You'll want to give them easy and secure access to your financial records, personnel files, and formation documents. Buyers will be looking for profit and loss statements, tax returns, ledgers, and other financial statements for the past three to five years. If you have business loans or licenses and permits for your business, you should have that paperwork ready as well. Getting this paperwork in order will also help you get a good idea of your business's profit and value.
Recast your tax return numbers for prospective buyers. Recasting your financials means adjusting your tax return numbers to reflect a more realistic picture for potential buyers. You want to remove any expenses that wouldn't necessarily apply to a future owner. For example, you can add back to your profits discretionary expenses. These expenses can include medical insurance for you and your family, travel and entertainment, business vehicles, memberships and subscriptions, and salaries and bonuses paid to family members. In recasting your tax numbers, you're not deceiving either the IRS or prospective buyers. You're simply pointing out that the buyer might prefer not to spend money on some of these items in the future.
Make cosmetic improvements to your business location. If you own a store, office, or other business location that can use some minor improvements, it might be a good idea to invest in some cosmetic upgrades. If your store has paint peeling or broken lights, then these are easy, low-cost fixes. For other, more expensive projects, consider the return on investment. Will replacing the flooring or windows translate to a higher sales price?
Before you sell your business, determine how much it's worth. Keep in mind that if you price your business too high, you'll scare off potential buyers. Price it too low and you'll leave money on the table. But don't expect the perfect sales price—you won't know how much it's really worth until the day a buyer writes you a check.
There are several different methods to value your business and set a price. Here's how to come up with a sales price.
Even though setting the ideal price is next to impossible, you can arrive at a reasonable asking price or a price range. Some approaches to pricing a business are:
To figure out a realistic price range, you can use one of the above methods—and then maybe blend the results. For example, you can base the price on the value of the business's assets, and add in a sum for the goodwill the business has developed.
Depending on your business, the low end of your price range will probably be little more than the liquidation value of the assets. The high end is likely to be based on income projections and on what an enthusiastic buyer might pay for the right to receive (and hopefully increase) those earnings in the future. If you have a healthy business—especially one with a well-established customer base and positive reputation—you'll probably pick an initial asking price towards the top of your range and then, if necessary, be prepared to back off a bit in negotiating.
Several factors that don't involve the business's income, assets, or comparables also go into pricing a business. These include:
You'll need to take into account the general economic climate as well as trends in your industry—positive or negative. And, of course, if you have to sell quickly, you might need to settle for less.
Pricing your business can be an overwhelming task. If you need assistance, consider talking to a professional with experience in your industry, such as an accountant or appraiser. Accountants will help you organize and evaluate your financial data. Appraisers can help you set a price for the business or just value your business's assets.
Taxes can take a huge bite out of the money you receive for your business. It pays to know just how big that tax bite will be—and to try to lower it, most likely with help from a CPA or other tax expert.
Your tax bill will be influenced by two key factors: How your business is legally set up and—in the case of a corporation or limited liability company (LLC)— whether you're selling the assets or the entity.
Sales of all sole proprietorships and almost all partnerships are asset sales. Many corporation and LLC sales are also asset sales because buyers can purchase the assets they want and leave the liabilities.
If your business is well known, word that it's for sale might be enough. Or, possibly someone close to you—an employee, a friend, or a customer—could be a prospect. But more likely, you'll need to reach out to a bigger pool.
A broker, if you use one, will do the heavy lifting to find a buyer. Business brokers often have connections and contacts that can open up a new base of buyers.
If you don't use a broker, then you'll need to advertise the sale yourself. You can put advertisements:
Make sure you're clear about what comes with the business. If you have real estate, equipment, or vehicles you want to include in the sale, you can mention these items in your listing.
After you find a buyer, you don't simply hand them the keys after they hand you a check. You'll need to iron out the details of the deal so that both sides are on the same page about what's expected from each other. In working out the terms of the sale, some key issues include:
A broker can help you make your case for your asking price. A business broker can also have a good idea about what's typical for a sale in your industry. Their expertise can help manage your expectations while reaching your desired result. These negotiations are also a good time to involve a business attorney who has experience with large business transactions.
Check out our article on how to negotiate a business contract for more tips and strategies.
After negotiations, you'll need to put the final deal in writing. Among other things, your agreement should:
The sales price and what's included in the sale will be the big negotiation points. Sometimes, the sides will sign a letter of intent (LOI) or term sheet before working out the sales agreement. LOIs are popular for big transactions and are meant to cover the main points of the deal. If you and the buyer can agree on an LOI, then you'll be better positioned to sit down and work out the finer details.
If you attempt the first draft of the sales agreement yourself, have it reviewed by a business lawyer to make sure you've covered all the bases. An experienced lawyer might have suggestions for how to limit your liabilities and improve your protections.
The closing is the meeting at which you transfer the business to the buyer. To reduce last-minute hassles, make a checklist of all the papers you and the buyer will need to bring—everything from the documents and money associated with the transfer to your alarm codes, keys, and customer lists.
After the sale, you and the buyer need to jointly complete IRS Form 8594, Asset Acquisition Statement Under Section 1060. Both parties must include Form 8594 with their income tax return for the year of the sale.
Talk to an accountant or tax professional about how to report your sale to the IRS. Consulting a professional can help you make sure that the sale is reported correctly and promptly. They can also potentially reduce your tax liabilities.
Selling your business involves many moving parts. From preparing your business for the sale to finding buyers to closing the deal, each step takes time and commitment. Most business owners benefit from employing a professional at some stage of the process—whether it's a broker to find a buyer or an attorney to write up the sales agreement.
Regardless of whether you seek professional help, it's a good idea to educate yourself about the sales process so you know what to expect. Check out our sections on buying and selling a business and business taxes for more tips and guidance on the process.