3 Step process of selling a business from start to finish
March 13, 2023 ⋅ 16 min read
We’re building Baton to help small business owners understand and realize the value of their businesses. Whether you run a boutique retailer or a multi-unit doughnut business, we can help you understand the value of your business and connect you with potential buyers and partners. But understanding your business's value is just one stop on the journey of selling your business. In this guide, we’re going to break down the three-step process every company goes through when selling to help you better understand what it takes to sell a business.
Preparing for the sale
Before you start talking to potential buyers, there are things you can do to help maximize the value of your company and streamline the sales process.
We’ll describe what this process can be like and how to think about various steps on the sales journey.
After the sale
Selling a business isn’t like selling a car or a house. When you hand over the keys, there are usually obligations to the new owners you have to fulfill. We’ll walk you through what that can look like.
Many first-time business sellers can get overwhelmed by the business sales process, but it is doable. With the right groundwork and potential help from advisors, many small business owners have sold their companies to great buyers, future stewards of their life’s work, and gone on to create new businesses or simply retired and enjoyed the good life.
Preparing for the sale
Selling a business is not as simple as throwing it up on Craigslist like an old couch and waiting for people to call you. Depending on the size of your business and your industry, there are things business owners typically prepare to make the sales process smoother and to improve the value of your company as you start talking to buyers.
When looking at bigger companies that go through an M&A (mergers and acquisitions) process, there are usually teams of lawyers and accountants working for the buyer and the seller to help complete the transaction. We’re not suggesting you hire $1,500/hr lawyers to help you sell the doughnut shop, but there’s a reason these sophisticated companies pull together teams of smart people to help them sell their business. Buyers want certainty in what they are purchasing. Simplifying the process of due diligence makes your business more attractive to potential buyers, and increases the likelihood of receiving a high-priced offer.
There are a few key things that you can prepare to make the process simpler and potentially more lucrative.
Gather and share financial information
Any buyer will be looking at your financial statements almost above all else, and they’re going to place a value on your business based on your revenue and profitability (or lack thereof). If you don’t have an accountant or bookkeeper and you’ve been managing things yourself, now is the time to engage a financial professional to help you clean things up. Most small business owners run personal expenses through the business. You’ll want to “normalize” your profit and loss statement to show what those are, so that you can get the value for the business that it actually generates, rather than what you just report for tax purposes.
Additionally, any sophisticated buyer is going to want to see your profit and loss statement, your balance sheet, your bank statements, and your tax returns to ensure that the financials you’re sharing are accurate.
In any business acquisition, a buyer is likely looking at the value of your business through the lens of what you own and how much money they expect to make. In a business acquisition, assets most likely consist of:
Any money you have in the business bank account.
If you sell physical products or rely on key suppliers, this will apply. How much inventory do you have on hand? And how much will you be transferring over to the buyer when you sell?
Equipment, land, and property
If you own a fleet of vehicles to deliver your donuts to other local shops, bought industrial kitchen equipment, etc., you should have a good understanding of how much you’ve materially invested into the business and when you made such purchases.
Intangibles and goodwill
Things like your brand, any trademarks you may own, etc.
Real estate valuations
Do you own the real estate where your business operates? If so, you’ll want an independent assessment of the value of that real estate. You don’t have to sell your real estate. Many owners decide to keep the real estate and lease it back to the buyer. A leaseback option can be great if you want to maintain some residual income after the sale, but keep in mind some buyers may only be interested in purchasing both the real estate and your business.
Many small business owners borrow money to finance their businesses. As part of a sale, that debt is typically paid off when you close before you receive any money. You’ll just need to understand that the amount of cash you’ll net from the sale will be the net of the debt that is paid off.
Gather other due diligence information
The more organized information you have about your business the better. Below, we’ve highlighted some common things buyers may want to review during the due diligence process.
Quality historical data, key performance indicators (KPI's)
The more information you have on your operations the better. Buyers may want to understand: how many customers you have and what they look like, your customer attrition rate, and the size of your email list.
Most buyers will want to know if anyone owns the business besides you. Are there other equity investors in the business? Are there employees who own the business through an employee stock ownership plan? Will those employees expect that plan to continue after the sale?
Define your goals, the reason for selling, and potential exit strategy alternatives
It’s important to understand your “why”, as that will help you identify what to expect during the sales process and the types of buyers you may want to work with.
You’ll likely also want to consider your personal finances. If you’re planning on retiring, can the money from the sale support you in retirement? Many owners run expenses through their business that they’ll need to take on personally after a sale, like health insurance and car payments. Make sure that you’re able to afford the lifestyle you want after you sell your business.
Determine your business value
Valuations for small businesses may be based on a multiple of SDE (seller discretionary earnings or cash flow) or EBITDA (earnings before interest, taxes, depreciation, and amortization). If you’re currently taking home $200k in earnings every year from your business, you can expect a buyer to pay that multiplied by somewhere between 1-5X).
Generally speaking, bigger businesses that are well-managed command higher multiples. Standard multiples tend to vary by industry.
At Baton, we believe every business owner deserves to know what their business is worth — so we made it free. We evaluate hundreds of comparable businesses, taking location, industry, and other factors into consideration, and compare the results of a variety of valuation methods (eg. discounted cash flow, cash flow multiples, revenue multiples, EBITDA multiples, and more). Our proprietary algorithm weights these values to produce an estimated valuation range that gives owners a realistic view of what the business may be worth if sold today. Along with your valuation range, we’ll provide actionable advice on how to prepare your business for a sale and maximize your chances of selling on the higher end of the range, along with personalized connections to our vetted partners.
Decide if you want to work with a business broker
Some small business owners will choose to sell their businesses themselves, while others decide to engage with a business broker. At the very least, we recommend you engage an experienced business attorney to help you navigate the sale. If much of what we’ve shared already sounds tiresome and confusing, an experienced business broker will help you pull together all the documents and financial information, and give you an understanding of the market conditions that will support the sale of your business.
After receiving a valuation, if you decide you're ready to sell, you can work directly with one of Baton's experienced Transaction Advisors who will guide you through every step of the process.
Focus on enhancing business value before the sales process
One of the things you can control is cleaning up certain aspects of your business that will make it more attractive to buyers. Are you heavily reliant on key customers or suppliers? If so, now is the time to diversify, as those relationships will present a risk to a potential buyer. Are you staffing your business as tightly as you could? Or are you generally overstaffing to make your life a bit simpler?
Baton makes it easy to help you understand the factors that may increase your business’ value - get started with a valuation today.
During the sale
First, you’ll need to “market” the business like you would anything else you sell. You’ll spend a great deal of time talking to potential buyers - some will be “kicking the tires” trying to learn about your industry, while others will be serious and willing to move quickly, as they’ve done the work beforehand to know they want to buy a company like yours. Expect this process to take anywhere from three months to a year or more, depending on your desired sale price and how much demand there is in your market for potential acquisitions.
List business for sale
There are plenty of buy/sell websites for small businesses. Baton is one - where after performing a business valuation, we give you the option to connect with qualified buyers.
If you decide to work with a broker, they will likely list your business on websites frequented by buyers.
Market business for sale
Pulling together a package that highlights your business can be hugely beneficial for expediting the sales process. Generally, companies will put together a CIM (confidential information memorandum) that highlights the business, its history, its financial performance, growth potential, etc. This allows interested buyers to quickly assess if your company is what they’re looking for.
Qualify potential buyers
People and companies buy businesses for very different reasons. Hopefully, when you go to sell, you will have lots of different buyers who express interest. Here’s a breakdown of what to expect from different types of potential buyers:
Strategic buyers and private equity firms (PE)
If you run a sizable business, you’ve probably received calls from these folks. They’re generally either in the business of buying and growing companies, or they already own a company that is complementary to yours.
They’ll usually keep your branding and your operations and they make their money by centralizing things like your legal, accounting, marketing, tech, purchasing, etc. The downside to selling to a PE firm is that they can be a bit soulless — the culture you’ve built will get absorbed by their larger corporate culture. On the plus side, they generally pay top dollar for great companies.
Competitors and multi-unit owner/operators
There are a handful of smaller groups and even individual business owners and operators that will potentially acquire your business as a means of growing their own company. The level of experience with buying other businesses can vary with these groups.
These types of buyers can often compete with the larger PE firms on price and the upside for you is that you’re selling to other people that work day-to-day in your industry and are likely qualified buyers.
The upside here is that you’ll be selling your business to a person or group that is personally invested in it moving forward. They may be trying to buy a “job” or a means of supporting themselves, so they’ll be keen to understand as much as they can about how you run the day-to-day so that they can keep your business operating efficiently once they take over. Selling to individuals is a great way to preserve your legacy, but they may often have less wiggle room than larger, investor-backed groups when it comes to your target sale price.
Negotiate the deal structure
Once you’ve identified some interested buyers, it’s time for the fun part: figuring out how much you’re willing to sell for and what they’re willing to pay. Many small business sales are all-cash asset transactions — meaning the buyer will write you a check for the full value of your business, and the purchase agreement will stipulate that you’re essentially transferring everything your business owns over to the buyer. They’re not actually buying your legal entity, they’re just buying all the assets and select liabilities owned by the company. Sometimes businesses sell all their “stock” or “equity”, but that introduces a layer of complexity and risk that most small business buyers don’t want to deal with. Check out my guide to selling to get a deeper understanding of this.
In some instances, you may consider “seller financing” — where you take some portion of the purchase price upfront and the rest over time. This could be fixed or variable. If it’s fixed, you’d sell your doughnut shop for say $1M, the buyer would pay $500k upfront, and then use the proceeds of the business after they take over to pay you the additional $500k over some set period. This often allows the buyer to complete the transaction more quickly and easily as they don’t need to come up with such a large amount of cash upfront. It gives the owner an annuity — meaning you get a nice chunk of cash upfront and then you have guaranteed income coming in over the next several years.
You could also negotiate an “earn-out”, where that future consideration is tied to the business’s growth. Usually, this will have some parameters or a cap. Using that same example, you sell your doughnut shop for $1M. You receive $500k in cash, with an additional $500K paid out over the next 5 years if you continue to hit your presale revenue numbers, with a 20% upside potential if you increase revenues to some degree moving forward.
Prepare legal documents
Once you’re close on the acquisition terms, a buyer will submit an LOI or Letter of Intent, akin to a written offer. Generally, a verbal offer comes first, but sometimes a buyer may send you their offer in writing. It will include the purchase price, some due diligence period, the expected date you’ll close the deal, and any other particulars you may have included in a negotiation. Once you sign the LOI, you’ve moved from dating to the engagement period. Generally, as part of the LOI, there will be an exclusivity clause that means you can’t engage other potential buyers while the buyer performs their final due diligence.
The LOI should also have a projected Due Diligence period, during which you will provide all the information needed for the buyer to do all their homework. If all goes well, you’ll finalize all the legal agreements, and close by that date.
Post LOI, the buyer is likely going to present you with a laundry list of things they want to review: all your financials, bank statements, insurance policies, customer lists, corporate governance documents, etc.
Negotiate the purchase agreement
The buyer often generates the legal documents necessary for a sale, called a Purchase Agreement. You’ll be faced with a lot of new jargon, legalese, and business concepts you’re probably unfamiliar with. Having a great business lawyer that has M&A experience, ideally with small businesses similar to yours, is typically worth every penny.
The main thing to understand about a purchase agreement is that the buyer will want to limit their risk and liability when they take over the business. Brokers and attorneys can help you understand what’s normal here.
Once you’ve come to a full agreement with the buyer, it’s time to close! At this point, they’ll have performed all their due diligence, and you’ll have negotiated and compromised on any outstanding points in the purchase agreement.
When it’s time to finally close, you’ll work with attorneys to sign the purchase agreement and any other necessary legal documents. If there is money being held in escrow, the buyer will wire that to the escrow agent (usually one of your attorneys). If you have any outstanding debts, the buyer may pay those off directly, or they’ll want confirmation they have been paid off. Once you’ve wired your money, it’s time to transition the business to its new owner.
After the sale
Transition the business
Transitioning a business over to a new owner can be seamless, or incredibly long and complicated. A lot depends on you, the seller, how well your business runs itself without your involvement, and how much the buyer knows about operating a company like yours. If you sell the doughnut shop to another doughnut company - they may not need much from you post-close. Normally, there is some free consulting baked into the purchase agreement, where you’ll be available for the first few months to answer questions, etc.
Other business buyers will require you to stay on for a period of time to help them get up to speed with running your business. If you’ve negotiated an earn-out, you’ll be incentivized to continue driving revenue for the business. Similarly, if the buyer has used seller financing, you’ll want to set them up for success to ensure that they continue to profit and are able to pay you moving forward.
If you want to minimize your involvement post-close, the best thing you can do is to document and organize as many of your regular business processes as possible.
You’ll probably work with the buyer to help transition all of this over to them, so the more organized and ready to move, the faster it can go, and the sooner you can take the proceeds from the doughnut shop and roll them into your new banana stand.
When first-time business sellers see how much complexity goes into selling their business, they can get overwhelmed, but we promise this is all doable. It helps to consult with people that are involved in valuing and supporting business transactions day to day, and that’s where Baton can help.
Baton can get you started on the sales process with a free business valuation. That will help you understand if selling your business meets the needs of your “why”. If you’re not ready yet, we can offer some helpful guidance on ways you might increase your business valuation. If you decide the valuation range the market can support would get you where you’d like to be, we can help by matching you with one of our experienced Transaction Advisors who can work with you through the sale process, with the goal of making it as simple as possible.